Automated Trading and High Frequency Trading Robots

A good reason for night trading is that hedge funds who trade with an automated system, may not run as many robots trades. (HFT).

What is an HFT?

Wikipedia's definition for high frequency trading is "execution of computerized trading strategies characterized by brief position-holding periods, in many cases taking advantage from microstructure inefficiencies. In high-frequency trading, programs analyze market data to capture trading opportunities that may open up for only a fraction of a second."

On May 6, 2010, in just a couple of hours, the Market lost $1 trillion in value due to the "flash crash". The plunge was caused by computers trading HFT strategies, executing order after order, buying and selling in less than a second. As the Market began to fall, it triggered HFT's to start executing. HFT's are constantly watching the Markets, looking for trading opportunities. On May 6th, they found many of them.

For technical analysis traders, perhaps the worst thing that can occur is: you are following your trading strategies, you are keeping to your overall trading plan, and suddenly, boom, you get stopped out by an HFT. You watch moving averages, MACD, stochastics. The all signal the exact direction of the Market and everything looks great. But the Market breaks out and goes in the opposite direction. Today, exchanges finally admit that 70% of all trades executed are coming from HFT's. Will that change? It is very unlikely. The exchanges are making huge revenue off of HFT's. Exchanges have allowed HFT's to co-locate their computers inside the exchanges, paying huge fees for that privilege. Why would exchanges want to terminate this source of income? They have investors and dividends to pay.

Say you are a smaller day trader, buying and selling from your desktop trading platform. You can see a potential great opportunity to enter a position (long or short). You click buy your trading platform. At that point, the offer to buy goes from your desktop to the exchange via the internet. This may take several hops. A hop is an intermediate connection in a group of connections that link two network devices. Your request to buy goes through a number of routers before it can arrive at its final destination, namely the exchange (NYSE, CME, etc.). Each time your offer to buy is forwarded to the next router, that is one hop. The more hops, the longer it takes for your request to buy to go from your trading platform to the exchange.

Suppose that you have co-located your computer inside the exchange. There are no hops. In fact your computer is hard wired to the exchange's execution data feed, so your request to enter a position doesn't go over the internet at all. Wouldn't that be an incredible advantage to getting into and out of a position in seconds...the same seconds it takes for your desktop trading platform request to buy to even arrive at the exchange. And if 70% of trading is now coming from HFT's, that gives them an unfair advantage over the day trader, and often a very long trading day for the smaller investor.

The more you can trade around HFT's, the better. In this case, less is more. Night trading has less HFT interference. You will find that night trading provides better opportunities for technical analysis, desktop trading systems, and trading strategies to perform more profitably, without so many strange breakouts coming from the opposite direction.

What time would be best for night trading? That all depends on where you live in the world. For the Futures Market, there is always a futures contract to invest in that is considered to be night trading.

If you experiencing losses trading S&P 500 Emini Futures, or if you are new to Futures trading and want more information, attend the Shadowtraders Webinar held on Monday nights.

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