High-Frequency Crypto Trading: How to Get Started

As digital asset markets mature, they attract more and more of the practices used in traditional financial markets. Thus, they give rise to new investment opportunities. The question is: how can you take advantage of these opportunities?

2019 has been the year of institutional adoption. In addition to the money, institutional investors have been injecting their tried-and-proven profit-making methods into crypto. HFT (High-Frequency Trading) and dark pools are examples of these methods.

Data on a screen.

What Is High-Frequency Trading?

High-frequency trading uses supercomputing and low-latency connections. Through such technology, trading algorithms of various degrees of sophistication place thousands of orders in fractions of a second. These algorithms analyze markets, pinpoint opportunities, and act on them, all according to a set of predetermined parameters.

Everything else being equal, speed is the variable that determines the edge the high-frequency trader enjoys. Thus, entities using high-frequency trading will do anything to gain the upper hand speed-wise.

The best move they can make in this regard is to have their trading servers placed physically close to the servers of the exchange. This is called “colocation.”

There has been some hype about how a number of exchanges have effectively “invited” institutional actors to the trough by offering colocation services. Huobi, ErisX, and Gemini are exchanges which have taken steps to support HFT. However, the colocation issue is a bit more nuanced than just handing the big boys the keys to the vault.

The Ins and Outs of Colocation

Digital asset exchanges have the option of deploying their matching engines in a data center, or the cloud. As made clear by exchange insiders, deploying their operation in a top-tier data center is the technically soundest approach.

Such a solution gives the operator full control over every nook and cranny of the infrastructure. It makes possible the fine-tuning of the inner workings of the exchange, creating a predictable and seamless experience.

All of this is true for data center-hosted trading systems too. High-frequency traders who have their trading engines in the same data center as the exchange can cross-connect via a special API. Other users can connect as well, over the internet, through a Websocket API.

Server room.

Cloud-based exchanges, on the other hand, have problems on all these fronts: latency, predictability, reliability, and uptime. In addition to that, clouds are hosted in data centers, meaning that unsanctioned colocation is possible in their case too.

The bottom line is that data center-hosted matching engines do not tilt the playing field toward institutional actors, any more than any other solution would.

A colocated and cross-connected HFT trading server will always have an advantage over manually trading retail traders.

The Benefits of High-Frequency Trading

HFT is a controversial practice. It drew flak in the past for causing flash-crashes in much bigger and better-established markets than the digital asset ones.

That considered, why would you, a retail investor, be interested in HFT? Here are some of the advantages of HFT, from the perspective of several different stakeholders in the digital assets market. Continue reading…

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