Ever wondered why the currency market moves so fast? Or, why it spends so much time in ranging conditions, before, suddenly, all currency pairs move at the same time? The answer comes from the High-Frequency Trading (HFT) industry. As the name suggests, there’s an entire “industry” responsible for trading super-fast and, most important, accurately.

Trading Algorithms in Today’s Markets

Robots and trading algorithms, more commonly known as bots and algos, buy and sell currencies to the eighth or ninth decimal place in a currency pair’s quote. As a comparison, retail investors typically use the fifth decimal place; and the fourth decimal place is well known as the ‘pip’.

Robots are an integral part of the HFT industry. They are essentially supercomputers that can execute thousands of trades per second. Or, even faster. They detect and trade on tiny moves in prices and are responsible for both market ranges and sudden spikes.

Typically, robots trade the news. Programmers can instruct robots to buy or sell depending on the outcome of important economic data. If the news beats the forecast and is positive for a currency, the trading algorithms will buy. More precisely, they will buy the very second the news comes out.

Furthermore, ALL active trading algorithms will trade. And, they will ALL do that in the same direction, and at the same time. The result is a sudden spike in the market’s volatility that occurs so quickly that retail investors can only join the party late, at future prices.

Trading algorithms can read text too. When pressing news comes out in the form of text (e.g. FOMC – Federal Open Market Committee Statement), programmers instruct computers to buy or sell based on changes in phrasing from one document to another. Needless to say, it all happens super-fast.

Also, robots trade snippets, or short “tweets” that the financial media transmit throughout the trading day. As a consequence, the market is always moving as long as there is an input for robots to buy or sell.

Automated Retail Investing

Retail investors saw the advantage of robots and started to build them too. These so-called expert advisors (EAs) buy or sell according to their instructions. While not as performant as the supercomputers of the HFT industry, these expert advisors open and close positions continuously throughout the trading week.

As well as trading algorithms and expert advisors, the pending orders used by manual retail investors are also considered automated trading. Statistically, over 80% of trading is automated, leaving less than 20% to the manual retail investor, and yet it is enough to attract investors to the trading game.

New technologies appear every year, and nowadays big institutional firms bet on Artificial Intelligence (AI) to be the next in line to change the trading industry. In fact, many investment banks already have a department that trades using AI. Whether AI will be a step forward or will disrupt the industry, remains to be seen in the years to come.

Main Takeaways:

  • Humans come second to robots in 21st-century trading.
  • Supercomputers used in the HFT industry are responsible for sudden market moves.
  • Trading algorithms can read text too.
  • Over eighty percent of today’s trading is automated.