Trading is a business that is constantly changing in terms of regulation, market structure, and trading styles. Arguably the biggest change within the industry within the past decade has been the emergence of high frequency traders (HFTs), who employ automated algorithms and black box strategies to execute certain types of trades faster than a human can.

Some strategies that automated traders use include low latency implementation of price arbitrage, trading for liquidity rebates, trading from sides of the spread then profiting from the difference, and price spiking or trading on the news.

If you are a human trader employing any of the above strategies, it is much harder to do so today than it was 5 years ago. By value, HFT was estimated in 2010 by consultancy Tabb Group to make up 56% of equity trades in the US and 38% in Europe. If you are not being mindful of when and how you are placing orders, a HFT may be eating your lunch.  

Here are 3 ways you can give yourself some protection against HFTs:

1. Avoid orders that float

Don’t use order types where you relinquish control of your fill price. Implement trailing stops to ease into positions for better risk management and to avoid big losses. Also use limit orders rather than mid-points - a mid-point or pegged order has an execution price that floats to the movements of the reference price. Trailing stops are another good tool in the arsenal – use them to ease into a larger position, manage risk, and avoid big losses. 

2. Use order routes that won’t show your whole hand

There are hundreds of ways to route your order. If you can, use routes that level the playing field on speed. Darks pools can be a good choice. IEX is a good example –  the dark pool adds a round-trip delay of 0.0007 seconds.

3. Pay attention to order flow

This is an important skill to have as a trader. The easiest way is to be able to read the ticker tape and charts of the stock you are trading. Once you have your finger on the pulse of the order flow, you can tell the difference from institutional volume and adjust accordingly. 

There are many factors that mark a successful trader, but a successful trader who stays on top of market structure also has the added benefit of longevity in the industry. Happy Trading!

The Hold Brothers Team, Contributors