Can individuals day-trade stocks using High-Frequency Trading (HFT)?
The answer is to your question is somewhat complicated. You will be unable to compete with the firms traditionally associated with High Frequency Trading in any of their strategies. Most of these strategies which involve marketing making, latency arbitrage, and rebate collection. The amount of engineering required to build the infrastructure required to run this at scale makes it something which can only be undertaken by a team of highly skilled engineers. Indeed, the advantage of firms competing in this space such as TradeBot, TradeWorx, and Getco comes from this infrastructure as most of the strategies that are developed are necessarily simple due to the latency requirements. Now if you expand the definition of HFT to include all computerized automated trading you most certainly can build strategies that are profitable. It is not something that you probably want to tackle on your own but I know of a couple of people that did go it alone successfully for a couple of years before joining an established firm to run a book for them. In order to be successful you will most likely need to develop a unique strategies. The good news is because that you are trying to deploy a very tiny amount of capital you can engage in trades that larger firms would not because the strategies cannot hold enough capital relative to the firms capital base.  I am the co-founder of a small trading firm that successfully trades the US Equities and Equity Derivatives markets. A couple of things to note is that if you want to do this you should consider building a real business. Having some more smart brains around you will help. You don't need exchange colocation for all strategies. Many firms, including ours, colocate in a data center that simply has proximity to the exchanges data centers. You will need to keep things simple to be effective.  Don't except all the group think that this is impossible. It is possible although as a single individual it will be more difficult. It will require long, long hours as you climb the algorithmic trading learning curve. Good luck. Nobody is going to stop you if you want to try that. But you should keep in mind that you have to invest a lot in getting the best hardware you can lay your hands on, best fail-safe connectivity to the exchanges, best trading algorithms and software that money can buy and loads of other stuff. This all needs quite a big amount of upfront investment without guaranteeing returns. That is why you see institutions with deep pockets i.e. banks and trading firms only involve themselves in HFT. "Yes you can, but to do so successfully, you need lots of money. You also need to be able to meet the criteria for being classified as a ""professional trader"" by the IRS. (If not, you'll be buried in paperwork.) The fact that you're asking about it here probably means that you do not have enough money to succeed at HFT." I just finished a high frequency trading project. Individuals can do it, but you need a lot of capital. You can get a managed server in Times Square for $1500/month, giving you access to 90% of the US exchanges that matter, their data farms are within 3 milliseconds of distance (latency). You can also get more servers in the same building as the exchanges, if you know where to look ;) thats all I can divulge good luck
It's not necessarily the case that HFT acts as a tax on small traders. I haven't seen any studies demonstrating that HFT increases the average cost of shares; if anything small investors will be largely unaffected by HFT as it will be random noise to them, sometimes creating a slight increase, sometimes a slight decrease. The people most affected by HFT are institutional investors, whom HFT desks are pretty good at predicting the order pattern of and hence exploiting. They have no interest or capacity to exploit the small guys. There's a lot of hype about HFT. It involves computers doing things that people don't really understand and making a bunch of rich guys a bunch of money, and there was a crisis and so we hate rich wall street guys this year, and so it's a hot-button issue. Meh. There's some reason for concern about the safety of the markets, but I think there's also a lot more of people trying to sell you a newspaper. Remember that while HFT may mean there are a lot of trades, the buying and the selling add up to the same thing. Meanwhile, people who buy stock to hold on to it for significant periods of time will still affect the quantity of stock out there on the market, applying pressure to the price, buying and selling at the prices that they think the security is worth.  As a result, it's unlikely that high-frequency trading moves the stock price very far from the price that the rest of the market would determine for very long; if it did, the lower-frequency traders could take advantage of it, buying if it's too low and selling if it's too high. How long do you plan to hold a stock? If you're trying to do day-trading, you might have some trouble; these people are competing with you to do the same thing, and have significant resources at their disposal. If you're holding onto your stock for years on end (like you probably should be doing with most stock) then a trivial premium or discount on the price probably isn't going to be a big deal for you. Can't totally agree with that. Volatility trading is just one trading type of many. In my opinion it doesn't depend on whether you are a professional trader or not.  As you might have heard, retail traders are said to create 'noise' on the market, mainly due to the fact that they aren't professional in their majority. So, I would assume, if an average retail trader decided to trade volatility he would create as much noise as if would have been betting on stock directions. Basically, most types of trading would require a considerable amount of effort spent on fundamental analysis of the underlying be it volatility or directional trading. Arbitrage trading would be an exception here, I guess. However, volatility trading relies more on trader's subjective expectations about future deviations, whereas trading stock directions requires deeper research of the underlying. Is it a drawback or an advantage? I.d.k. On the other hand-side volatility trading strategies cover both upward and downward movements, but you can set similar hedging strategies when going short or long on stocks, isn't it? To summarise, I think it is a matter of preference. Imagine yourself going long on S&P500 since 2009. Do you think there are many volatility traders who have outperformed that? "If you're going to be a day trader, you really need to know your stuff.  It's risky, to say the least. One of the most important elements to being successful is having access to very fast data streams so that you can make moves quickly as trends stat to develop in the markets.  If you're planning on doing this using consumer-grade sites like eTrade, that's not a good idea.  The web systems of many of the retail brokerage firms are not good enough to give you data fast enough for you to make good, timely decisions or to be able to execute trades way that day traders do in order to make their money.  Many of those guys are living on very thin margins, sometimes just a few cents of movement one way or the other, so they make up for it with a large volume of trades. One of the reasons you were told you need a big chunk of money to day trade is that some firms will rent you out a ""desk"" and computer access to day trade through their systems if you're really serious about it.  They will require you to put up at least a minimum amount of money for this privilege, and $25k may not be too far out of the ballpark. If you've never done day trading before, be careful.  It doesn't take much to get caught looking the wrong way on a trade that you can't get out of without losing your shirt unless you're willing to hold on to the stock, which could be longer than a day. Day trading sounds very simple and easy, but it isn't.  You need to learn about how it works (a good book to read to understand this market is ""Flash Boys"" by Michael Lewis, besides being very entertaining), because it is a space filled with very sophisticated, well-funded firms and individuals who spend huge sums of money to gain miniscule advantages in the markets. Be careful, whatever you do.  And don't play in day trading with your retirement money or any other money you can't afford to walk away from. I hope this helps. Good luck!" "Day trading is an attempt to profit on high frequency signal changes. Long term investing profits on low frequency changes. What is the difference? High Frequency Signal = the news of the day. This includes things like an earnings report coming out, panic selling, Jim Cramer pushing his ""buy buy buy"" button, an oil rig blowing up in the ocean, a terrorist attack in some remote region of the globe, a government mandated recall, the fed announcing an interest rate hike, a competitor announcing a new product, hurricanes, cold winters, a new health study on child obesity, some other company in the same sector missing their earnings, etc. Think daily red and green triangles on CNBC: up a buck, down a buck. Low Frequency Signal = The long term effectiveness of a company to produce and sell a product efficiently plus the sum of the high frequency signal over a long period of time. Think 200 day moving average chart of a stock. No fast changes, just, long term trends. Over time, the high frequency changes tend to negate each other. To me, long term investing is wiser because the low frequency signal is dominated by a companies ability to function well over time. That in turn is driven by the effectiveness of its leadership coupled with the skill and motivation of its employees. You are betting on the company and its people. Pseudo-random shorterm forces, which you can't control, play less of a role.  The high frequency signal, on the other hand, is dominated by sporadic and unpredictable forces that typically can't be controlled by the company. It has some tinge of randomness about it. Trying to invest on that random component is not investing at all, it is gambling (akin to ""investing"" in that next coin flip coming up heads) I understand the allure of high frequency trading. Look at the daily chart of a popular stock and focus on the up and down ticks. Mathematically, you could make a killing if you could just stack all those upticks on top of each other. If only it was that easy." "FYI, USA is not the only country in the world. If you try to stop people from making money, they will go do it elsewhere. Other countries are more than willing and competent, to accept these HFT folk.  Even if all countries stop HFT. There will be encrypted black markets for this on the internets. Google ""dark pools"". Regulators are light years behind the ingenuity shown by Wall Street to find inefficiencies in the market.  Computers and quantitative finance are here to stay. You cannot ask people to trade using emotions like during the Great Depression Era." "n1. go to tradeworx.com and you can read some papers.  2. Revenues of hft have gone down substantially. About 15 years ago the total market was around 7 billion, it has dropped to 1 billion this year.  3. ""no goods or valuable services are produced.- That is false. hft provides liquidity and low spreads. There is a reason why you can buy or sell a share of a stock and the spread is 1 penny. One of the main reasons to go public is to have the secondary market liquid.   There is a reason you can instantly sell or buy a stock... Do you realize you used to have to actually call your broker and he had to negotiate an order on the floor? hft makes the markets more efficient. The average person can sign up an online acct and trade/invest for basically nothing. Why do you think that is?  finally who are you to say how I can or can not allocate my money. If I develop my own strategy that trades every second why can't I?" If #2 is how it really worked I would approve.  In the real world, entities who have the money to purchase access have systems which are in a position to execute strategies which shave pennies of of people who want to make real trades. I want to sell for $61.15 and someone wants to buy for $61.10 and the HFT traders force both hands and make their money on that nickel in between us. Lowered bid ask spread. If you as a market market have to onto inventory (risk) for a long period then you have to charge your customers a commensurate premium. The groups who have lost because of HFT are big banks, any large investor who used to get preferential treatment from brokers, and floor traders. The groups who have won are retail investors and those investors who weren't large or connected enough to get preferential treatment from brokers (majority of investors). I will assume that you are not asking in the context of high frequency trading, as this is Personal Finance Stack Exchange. It is completely acceptable to trade odd lots for retail brokerage customers. The odd lot description that you provided in your link, from Interactive Brokers is correct. But even in that context, it says, regarding the acceptability of odd lots to stock exchanges: The exception is that odd lots can be routed to NYSE/ARCA/AMEX, but   only as part of a basket order or as a market-on-close (MOC) order. Google GOOG is traded on the NASDAQ. Everything on the NASDAQ is electronic, and always has been. You will have no problem selling or buying less than 100 shares of Google.  There is also an issue of higher commissions with odd lots: While trading commissions for odd lots may still be higher than for   standard lots on a percentage basis, the popularity of online trading   platforms and the consequent plunge in brokerage commissions means   that it is no longer as difficult or expensive for investors to   dispose of odd lots as it used to be in the past. Notice what it says about online trading making it easier, not more difficult, to trade odd lots. There is indeed a market for single stock futures, and they have been trading on the OneChicago exchange since 2002. Futures are available in 12,509 individual stocks, according to the exchange's current product listing. One advantage they offer over trading the underlying stock is the significantly higher leverage that is available, combined with the lack of pattern day trader rules that apply to stocks and similar securities. Single stock futures have proven to be something of a regulatory challenge as it has been unclear whether their oversight is the remit of the SEC/FINRA or the CFTC/NFA. High frequency trades are intra day. The would buy a stock for 100 and sell for 100.10 multiple times. So If you start with 100 in your broker account, you buy something [it takes 2-3 days to settle], you sell for 100.10 [it takes 2-3 days to settle]. You again buy something for 100. It is the net value of both buys and sells that you need to look at. Trading on Margin Accounts. Most brokers offer Margin Accounts. The exact leverage ratios varies. What this means is that if you start with 10 [or 15 or 25] in your broker you can buy stock of 100. Of course legally you wont own the stock unless you pay the broker balance, etc. I agree. Small investors got screwed worse with manually traded shares. Electronic trading was a big part of why fees for trades have come down so much over the years. HFT acts as a tax on small traders, but it is fairly insignificant.  This isn't to say that HFT isn't a problem. Systems that cause flash crashes with no one understanding why, isn't good for the market. A small fee is a small change that could provide a solution to the problem. "This is a very important question and you will find arguments from both sides, in part because it is still understudied. Ben Golub, Economics Ph.D., from Stanford answers ""Is high-frequency trading good for the economy?"" on Quoram quite well.  This is an important but understudied question. There are few   published academic studies on it, though several groups are working on   the subject. You may be interested in the following papers: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1569067 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1361184 These document some of the phenomena that arise in high frequency   trading, from a theoretical and an empirical perspective. However, a   full equilibrium analysis of the unique features of high frequency   trading is still missing, and until it is done, all our answers will   be kind of  tentative. Nevertheless, there are some obvious things one can say. Currently,   high frequency traders are competing to locate physically closer and   closer to exchanges, because milliseconds matter. Thus, large amounts   of money are being spent to beat other market makers by tiny fractions   of a second. Once many firms make these investments, the market looks   like it did before in terms of competition and prices, but is a tiny   bit faster. This investment is unlikely to be socially efficient: that   is, the users of  the market don't actually benefit from the fact that   their trades are executed half a millisecond faster -- certainly not   enough to cover all the investment that went into making that happen. Some people who study the issue believe that high frequency trading   (HFT) actually exacerbates market volatility; some plots to this   effect are found in the second paper linked above. There is certainly   no widely accepted theory that says faster trading technology   necessarily increases efficiency, and it is easy to think of   algorithms that can make money (at least in the short run) but hurt   most other investors, as well as the informational value of the   market. One caution is that some of the complaining about HFT comes from those   who lose when HFT gets better -- old-style market makers. They   certainly have an incentive to make HFT out to be very bad. So some   complaints about the predatory nature of HFT should be taken with a   grain of salt. There is no strong economic consensus about the value   of this activity. For what it's worth, my personal impression is that   this is more bad than good. I'll post an update here as more   definitive research comes out. You can also find a debate on High-frequency trading from the Economist which gives both sides of the argument. In conclusion: Regardless of how you feel about HFT it seems like it's here to stay and won't be leaving in the foreseeable future. So the debate will rage on... Additional resource you may finding interesting: Europe Begins Push To Ban HFT High Frequency Trading Discussion On CNBC Should High Frequency Trading (HFT) be banned ?" "In US public stock markets there is no difference between the actions individual retail traders are ""permitted"" to take and the actions institutional/corporate traders are ""permitted"" to take.  The only difference is the cost of those actions.  For example, if you become a Registered Market Maker on, say, the BATS stock exchange, you'll get some amazing rebates and reduced transaction prices; however, in order to qualify for Registered Market Maker status you have to maintain constant orders in the book for hundreds of equities at significant volumes.  An individual retail trader is certainly permitted to do that, but it's probably too expensive. Algorithmic trading is not the same as automated trading (algorithmic trading can be non-automated, and automated trading can be non-algorithmic), and both can be anywhere from low- to high-frequency.  A low-frequency automated strategy is essentially indistinguishable from a person clicking their mouse several times per day, so: no, from a legal or regulatory perspective there is no special procedure an individual retail trader has to follow before s/he can automate a trading strategy.  (Your broker, on the other hand, may have all sorts of hoops for you to jump through in order to use their automation platform.) Last (but certainly not least) you will almost certainly lose money hand over fist attempting bid-ask scalping as an individual retail trader, whether your approach is algorithmic or not, automated or not.  Why?  Because the only way to succeed at bid-ask scalping is to (a) always be at/near the front of the queue when a price change occurs in your favor, and (b) always cancel your resting orders before they are executed when a price change occurs against you.  Unless your algorithms are smarter than every other algorithm in the industry, an individual retail trader operating through a broker's trading platform cannot react quickly enough to succeed at either of those.  You would have to eschew the broker and buy direct market access to even have a chance, and that's the point at which you're no longer a retail trader. Good luck!"