Are High Frequency Trading and Algorithmic Trading the Same Thing?
In recent months, there has been much controversy around the practice of High Frequency Trading. There was even a feature about it on the US current affairs programme “60 Minutes” recently.
Why is it so controversial? Well, probably because there is much unease and fear among the general public about a world in which machines trade with each other, with no human involvement other than to program and operate those machines. This is the world of algorithmic trading, with the algorithms in question being computer programs that decide when, where and how to execute trades.
But what exactly is the difference between algorithmic trading and high frequency trading? Are they both in fact the same thing? Well, like many questions, the answer to this depends upon who you talk to. Most practitioners in the market would certainly agree that all high frequency trading is algorithmic. After all, when you are sending thousands (or even hundreds of thousands) of orders into the market in the space of a couple of minutes, it is completely impossible to do that without some pretty clever computer software (not to mention powerful hardware and ultra-fast communications links).
But can all algorithmic trading be classed as high-frequency? The answer to that question has to be no. Computer algorithms are used for many kinds of trading, not just high-speed, high frequency trading. For example, a quantitative hedge fund might use algorithms to determine when to buy and hold a stock as part of a long-term strategy. Or a sell-side broker might use an algorithm to split a large order from an institutional client into smaller chunks, to prevent (or at least to minimize) any adverse market movement.
The High Frequency Trading Review features interviews with various market participants and industry experts, all of whom have their own definitions of high frequency trading. These definitions differ in many ways, but most experts agree that high frequency trading is actually just a subset of algorithmic trading.
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