One of the questions cryptonians of all colors have been asking themselves for the last few years, is not what high-frequency trading (HFT) is, although the name of the article implies so. 

One of the biggest questions everybody’s wondering about is if the institutions will influx the crypto market any time soon. And this particular query has very much to do with HFT trading. 

Now, you will find out why. 

High-frequency trading (HFT) in traditional markets

As we’ve already covered in our piece about algo trading, in the world of traditional markets, the war between institutions is being waged for time, speed, volume, and price. In the U.S., two-thirds of all traditional trades are algorithmically driven. And it’s only fair.

With large trading volumes, data-processing speed is the key to making profits. The faster you place an order, the faster you get it filled. That’s why high-frequency trading (HFT) -a speed-oriented version of algorithmic trading – is so popular with large corps that trade significant portions of traditional assets and compete with each other.

But is there a place for HFT in crypto? 

To date, crypto markets have more than 150 active hedge funds placing orders, and other institutional investors are entering as well. 

High-frequency trading in cryptocurrency markets

In order to understand how soon the high-frequency concept may become a reality for the crypto segment, it makes sense to pay attention to the behavioral patterns of hedge funds and family offices, or institutional investors.

Once large institutional investors enter the market, the percentage of high-frequency trading in crypto most likely will increase.

However, we’re still observing the situation where crypto has only started drawing interest from institutions for several important reasons.

And for that, there are several important reasons.

First of all, the level of trust towards cryptos is not that high yet. HFT, present in traditional markets, is a clear indicator of high demand and trust for regular assets. 

Once cryptocurrencies are on par with other investment assets, such as fiat and stocks, high-frequency strategies will flood the market.

But we don’t have that level of trust towards cryptocurrencies yet.

There is one more reason why HFT trading is progressing quite slowly in the crypto niche, and it’s being derived from the first one.

In crypto, the trading volume is not high enough. Quite frankly, in order to get filled, you need to slightly increase the price. Because trading crypto (e.g. Bitcoin) is very popular among individual investors, there is no need for them to buy HFT black boxes in bulk, to get ahead of competitors. 

Although some individual traders use trading bots, the automation level in crypto markets is hardly comparable with traditional assets.

However, with all that being said, the niche constantly evolves, and several cryptocurrency exchanges flirt with the idea of high-frequency trading, for example, Xena Exchange, Huobi, Gemini and ErisX. 

Now, let’s take a deeper look at the concept as we know it today.

Advantages of using HFT 

As we’ve explained earlier, one of the biggest advantages of using HFT black boxes is their speed. No human, no matter how sophisticated, can act on market conditions as fast as a pack of very powerful algorithms locked inside of multiple black boxes. Especially if they are physically located near the exchange you trade on top of. There is even a specific term for these on-sight services – co-location.

In the hands of a dark pool provider, the HFT software can turn into a sophisticated tool and give you a significant advantage over other market players. With an order execution time of several milli- or microseconds, you can profit even from the smallest fluctuations in the market. 

Because algorithms can simultaneously scan multiple markets and exchanges enabling more trading, more arbitraging, and more market making opportunities. 

The HFT advocates insist that it makes markets more efficient by increasing competition and leveling the prices. 

Disadvantages of using HFT 

HFT has played a revolutionary role in the process of displacing a human trader figure from traditional financial markets. This is one of the major disadvantages for individual traders as they cannot compete with institutions that automate their processes 100%.

Yet, as much as an individual trader still matters, unfortunately, this is more than just about one human being. The key risk the automation of trading processes implies is the shocks it can transmit throughout global financial markets. 

In May 2010, an event known as the Flash Crash took place on top of electronic securities markets with S&P 500 and Nasdaq Composite collapsing below regular levels. The Dow Jones Industrial Average hit its second-biggest intraday point drop, and the HFT algorithms kicked off the aggressive sell-off, to withdraw from the markets in the face of uncertainty.

The crisis lasted for about 36 minutes with the Dow Jones Industrial Average falling more than 1,000 points in 10 minutes, the biggest drop in history at that point. According to Investopedia, “Over 20,000 trades in 300 securities were done at prices as much as 60% away from their values mere moments earlier, with some trades executed at absurd prices, from as low as a penny or as high as $100,000.


Hopefully, now you know what HFT is and that with crypto, it is not a matter of technical implementation, but rather an indicator that defines the reality present in the market these days.

Institutional investors are still not very much interested in the non-traditional assets and test the waters waiting for big players to enter the market first.

Once it happens, a lot of HFT solutions will very likely populate the crypto market, too. However, by press time, it hasn’t happened yet.