High-Frequency Trading

High-frequency trading (HFT) is a type of algorithmic trading strategies characterized by a large number of orders at very fast speed (they operate in milli- or microseconds). It is used by large investment banks, hedge funds and institutional investors and utilizes powerful computers, sophisticated technological tools and computer algorithms to rapidly trade securities (move in and out of positions in seconds or fractions of a second).

High-Frequency Trading and Gold

Many investors believe that the bankers using HFT create massive volumes of artificial traffic, or place and quickly cancel orders in order to create waterfall declines in the price of gold. However, most HFT firms trade only intra-day, so their impact on the gold market should be short-lived by definition. Moreover, HFT may actually be helpful for the markets, since it improves efficiency by discounting new information and driving the market into equilibrium much quicker. Additionally, since HFT companies execute thousands of orders an hour, they add liquidity to the market. Undoubtedly, some companies abuse this technology, but fraudsters have always existed. HFT may be considered as the next step to accelerate trades, as computers or financial press before. It may be used as a tool for manipulation, but not in a different way than computers before. As a reminder, financial institutions adopted extensive computer networks in the 1970s, when gold was in the bull phase. Similarly, HFT has been around at least since 1999, but it did not prevent the bull market in gold (see the chart below).

Chart 1: The HFT did not prevent the bull market in gold in the 2000s.

We encourage you to learn more about gold – not only about the impact of high-frequency trading on the gold market, but also how to successfully use the shiny metal as an investment and how to profitably trade it. A great way to start is to sign up for our gold newsletter today. It's free and if you don't like it, you can easily unsubscribe.