Difference between High Frequency Trading, Algorithmic Trading and Automated Trading

It’s been more than four months that I resigned from my previous organization [one of the expertise in Trade automation], but still whenever I speak about algo trading I often get questions like — isn’t it same as High Frequency Trading.

So, I just thought of putting a post and here it is -

What is Algorithmic Trading?

As mentioned in my previous article — Algorithmic Trading [AlT] from a Laymen Perspective, AlT is slicing of the order to achieve a good price for a specific period of time and moderate the aggressiveness in the market. The aim is not to sell high or buy low, instead the execution strategies offered by the sell side are used to get a good price for the order and monitoring closely the TC of the trade. The system has a predefined set of parameters and constraints which help in deducing the right price for the order. Also algorithmic Trading is mostly used for large orders, where slicing is possible.

What is Automated Trading?

Automated trading is the absolute automation of all steps of Trade Capture. That involves Order creation, order submission to the market and order execution. It also includes quantitative representation and parameters to determine what time the trade would close or initiate portfolio risk assessment and also include Algorithmic Trading. If you are an investor, then you would need to subscribe to these computer based systems often referred to as trading applications. Just choose the services, put in some funds and you are ready to trade. The automated trading service also comes with preloaded algorithms and execution strategies. You can easily monitor your securities performance over time or against industry set benchmark. The automated trading is usually done by hedge funds that utilize proprietary execution algorithms and trade via sponsored access or DMA.

What is High Frequency Trading?

High Frequency Trading [HFT] is a division of Automated Trading. To put it simply — HFT uses the modern age technology to execute the ancient trading strategies. Unlike the olden days, when manually people used to punch orders or trades were verbal, now with the evolving technology, it could be done at a lightning fast speed which no human brain could achieve. But the strategies are still the same.

HFT is simple use of technology to make speedy trades, which could last for milliseconds or less. HFT traders never ever hold any positions overnight, and you might see heavy trading execution done before the closing bell by HFT traders. The way the HFT firms gain is by trading for large or huge volume of trades, numbering even in the millions.

Wasn’t that simple? Hopefully that clears your doubt!!