Generating a profitable financial business idea requires careful planning and consideration. The financial industry is experiencing rapid growth, attracting many investors and traders. High-frequency trading technology has transformed the industry by enabling faster order processing, accurate pricing, and improved output.
Creating your own HFT platform can capture the attention of affluent entrepreneurs and institutional investors, significantly enhancing your potential. Let’s delve into the details of HFT firms and the costs associated with launching your own.
What does an HFT Firm Stand For?
The origin of high-frequency trading emerged when brokerage firms transitioned from stock exchange floors to digital platforms, enabling them to seamlessly connect with investors and execute orders much faster.
This transition reduced the order processing time from minutes to seconds. However, HFT technology further narrowed the processing time to milliseconds and microseconds, providing a significant competitive advantage.
Initially utilised in the NASDAQ exchange, this technology quickly expanded to Forex trading and other trading markets and operators.
High-frequency trading software is relatively more costly than traditional trading systems, and this technology is typically adopted by three major market players.
- Proprietary trading: Proprietary trading firms utilise their capital for investments rather than relying on funds deposited by investors, leveraging the expertise of professional traders and the speed of high-frequency trading (HFT) for execution.
- Hedge funds: Hedge funds employ HFT strategies to cater to affluent investors and institutions, demanding optimal trading conditions and swift access to the market.
- Broker-dealers: Broker-dealers buy and sell securities on behalf of their clients or for their own accounts, necessitating efficient processing systems and precise market rates facilitated by HFT technology.
Is HFT Profitable?
Direct access to trading venues is provided by high-frequency trading, enabling operators to identify the most favourable market opportunities. This method empowers brokerage firms to offer optimal trading conditions, such as minimal slippage, narrow bid-ask spreads, and rapid order settlement.
HFT firms generate profits in four main ways.
Arbitrage Trading
Arbitrage is a widely used strategy by professional investors and trading firms who take advantage of small price discrepancies between markets that are located in different geographical areas.
These disparities occur due to natural market dynamics and occur when markets are located far apart, for instance, the New York Stock Exchange and the London Stock Exchange, leading to price adjustments happening at varying times and resulting in slight differences in share prices.
As a result, high-frequency trading (HFT) firms exploit these very short-term variances to carry out large trades and generate significant profits.
Providing Liquidity
High-frequency trading allows financial organisations and liquidity providers (LPs) to purchase and sell securities and offer them to other participants at efficient prices. Retail and prime brokerage companies depend on LP services to supply tradable securities to their customers.
As compensation, HFT firms receive fees for providing liquidity to brokers. Leveraging this rapid technology, they can expand their influence and cater to additional brokerage firms and institutional clients.
Trading Activities
HFT companies profit by trading in the market using their funds and carrying out short and long positions, primarily in short-term assets. Technology allows investors and brokers to transfer substantial funds during both downward and upward market trends, seizing opportunities in the market.
Costs of Launching Your HFT Firm
High-frequency trading software might require a substantial, unaffordable investment for any startup or online broker. Nevertheless, if you are financially well-prepared, here are the anticipated expenses.
Platform
The platform for trading is where activities happen, and it incorporates high-frequency trading (HFT) software. Confirming that the platform can support a comprehensive HFT system with large volumes of liquidity and substantial market data is essential.
You can create the platform independently, obtain a pre-made solution, or contract the development. (Cost estimate: $10k — $25k).
Data
Ensuring your HFT platform’s success requires access to market data and feeds from stock exchanges. It’s crucial to secure a dependable data provider that offers real-time price updates at the tick level, millisecond-rate tracking, and large-volume execution capabilities. Anticipated expenses range from $5,000 to $50,000.
Server
A dependable server provides fast connectivity between your platform and the stock exchange, guaranteeing minimal (or even zero) slippage and narrow spreads. To enhance your pricing strategy, you will need a hosting solution that provides cross-connectivity with trading venues and liquidity pools. (Estimated expenses: $2,000 — $5,000 per month).
Licensing
The majority of regions do not offer specific licenses for HFT firms. Nonetheless, you must adhere to stringent regulations when integrating your business into the financial sector and acquiring authorisation as a regulated Forex broker or broker-dealer. This involves paying different application fees, meeting initial capital requirements, and covering operational expenses, which begin at $100k.
Final Considerations
High-speed trading has revolutionised the world of financial trading, providing institutions with a considerable edge in achieving success in the market. This innovation offers quicker direct access to the market, smooth processing of large-volume orders, and optimal trading circumstances.
Establishing your high-speed trading company demands a significant investment due to the robust data framework, hosting needs, and liquidity costs associated with creating a high-frequency trading platform.