High-frequency trading and limit orders

February 16, 2025March 22, 2023 by Clara PINTO

High-frequency trading and limit orders

In this article, Clara PINTO (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2020-2023) explains about high frequency trading in a dynamic limit order market.

What is High-frequency trading (HFT)?

While the adage “time is money” applies to almost all economic operations, the rapid spread of computerized trading has carried this quote to its final extreme. High-frequency trading (HFT) is a type of algorithmic trading that relies on advanced computer programs to make trading decisions and execute trades in a matter of milliseconds. HFT has become increasingly popular in recent years, particularly in dynamic limit order markets (“A dynamic limit order market with fast and slow traders”, European Central Bank), where the bid and ask prices of securities are constantly changing. This allows them to take advantage of small price discrepancies in the market and generate profits on a large scale, this method known as statistical arbitrage, involves traders looking for temporary pricing inconsistencies across different exchanges and capitalize on it, using ultra-fast transactions.

What Exactly Is a Limit Order?

A limit order is an instruction to buy or sell a security at a specified price or better. For example, a trader may place a buy limit order for a stock at $50, meaning he or she is willing to buy the stock only if it is available at that price or lower. Similarly, a sell limit order may be placed at $60, meaning the trader will sell the stock only if the price is at that level or higher.

HTF and Limit Order

High-frequency trading (HFT) and limit orders are closely linked, as HFT traders often rely on limit orders to execute their trades. In fact, limit orders are a key component of many HFT trading strategies. HFT traders often use limit orders in conjunction with advanced algorithms to identify market trends and execute trades at lightning-fast speeds. They may place many limit orders at various prices to take advantage of small price movements in the market and use sophisticated algorithms to determine the best time to execute their trades.

However, the use of limit orders in HFT trading can also have downsides. For example, the large number of limit orders placed by HFT traders can lead to increased volatility in the market, as these orders can cause sudden price movements, for example flash crash when the prices of stocks or commodities suddenly plunges but then quickly recovers. Hence, the use of limit orders in HFT trading can also have downsides, and it is important for regulators to monitor HFT activity and ensure that it does not cause market instability or unfair trading practices.

Why should I be interested in this post?

For many business school students, finance and trading are part of the most preferred jobs. Understanding the trends in high-frequency trading is now a requirement for future institutional investors. Being quick allows traders to adjust outstanding limit orders in response to news arrivals when working with “slow” market players who experience a relative loss in bargaining power, leading them to strategically submit limit orders with a lower execution probability, limiting trade.

Useful resources

SimTrade course Trade orders

Hoffmann P. (2013) A dynamic limit order market with fast and slow traders European Central Bank Working Paper Series.

Lewis M. (2015) Flash boys Norton & Company.

About the author

The article was written in March 2023 by Clara PINTO (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2020-2023).

Strategy and Tactics: From military to trading

March 22, 2023 by Clara PINTO

Strategy and Tactics: From military to trading

In this article, Clara PINTO (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2020-2023) shares her insights as a former military analyst on strategy and tactics applied to trading.

IRSEM: The Institute for Strategic Research at the Military School

Created in 2009, IRSEM is the strategic research institute of the French Ministry of Armed Forces and operates under the supervision of the Directorate General for International Relations and Strategy (DGRIS) operating under the umbrella of the Ministry for the Armed Forces. IRSEM is home to a staff of about forty civilian and military permanent researchers. The Institute seeks to foster the emergence of a new generation of researchers specialized in security and defense issues.

Logo of IRSEM.

Source: IRSEM.

From military to Finance: Strategy and tactics applied to trading

My experience as an analyst in a military Think tank required me to learn the basics of military strategy and tactics. The distinction between strategy and tactics is frequently stated as “strategy is long-term, whereas tactics are short-term.” While the two terms may exhibit similar qualities at times, it is an erroneous and partial explanation of their definitions.

Chinese General Sun Tzu wrote the difference this way: “All the men can see the tactics I use to conquer, but what none can see is the strategy out of which great victory is evolved.”

However, even if strategy and tactics are also used in business, their principles still apply in the trading context. Indeed, successful trading requires a solid understanding of both strategy and tactics. In this article, we will explore the differences between these two concepts and how they can be applied to trading.

Strategy refers to a long-term plan that outlines how you will achieve your trading goals. It involves identifying your objectives, assessing the risks and opportunities in the market, and deciding on a plan of action. A good trading strategy should be flexible enough to adapt to changing market conditions, but also structured enough to provide a clear path forward. One key aspect of a trading strategy is risk management. This involves identifying the potential risks associated with a particular trade and taking steps to mitigate them. This might involve setting stop-loss orders to limit potential losses or diversifying your portfolio to reduce the overall risk. A good trading strategy should also take into account the amount of capital you have available to trade with, as well as your risk tolerance and investment goals.

Tactic, on the other hand, refers to the specific actions you take to implement your trading strategy. These might include analyzing technical indicators to identify trends and patterns to assess the value of a particular asset. A successful trading tactic will depend on a number of factors, including the specific asset you are trading, and the current market conditions.

Ultimately, the success of your trading will depend on how well you are able to combine strategy and tactics. A strong strategy will provide a clear framework for making decisions and managing risk, while effective tactics will allow you to execute that strategy in a way that maximizes your returns. In order to develop a successful trading strategy, it is important to conduct thorough research and analysis of the markets you are interested in. This might involve studying historical market trends, analyzing economic and political factors that could impact the markets, or keeping up to date with news and events that could affect the value of specific assets. It is also important to remember that trading involves a degree of risk, and no strategy or tactic can guarantee success. However, by developing a strong strategy and using effective tactics to execute that strategy, you can improve your chances of making profitable trades over the long term.

In conclusion, strategy and tactics are both essential components of successful trading. A strong trading strategy provides a clear framework for decision-making and risk management, while effective tactics allow you to execute that strategy in a way that maximizes your returns. By combining careful research and analysis with disciplined execution, you can increase your chances of success in the complex and ever-changing world of trading.

Why should I be interested in this post?

Unfortunately, the concepts of strategy and tactics are often mixed up and not entirely understood. However, they provide a good framework to trade in the long term and structure your choices in the decision-making process.

Useful resources

IRSEM – The Institute for Strategic Research

About the author

The article was written in March 2023 by Clara PINTO (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2022-2023).

Investment is a flighty bird which needs to be controlled

March 22, 2023 by Clara PINTO

“Investment is a flighty bird which needs to be controlled”

In this article, Clara PINTO (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2020-2023) comments on a quote by Sir John Richard Hicks about investing.

Investment is a flighty bird which needs to be controlled

“Investment is a flighty bird which needs to be controlled” is a famous quote from Sir John Richard Hicks.

This quote means that investment is unpredictable and can easily change direction or fly away, so it needs to be managed or controlled carefully. Just like a bird, investment can be difficult to catch and keep in one place, so investors need to constantly monitor and adjust their strategies to ensure that their investments are secure and profitable. Without proper control over the portfolio and monitoring of the news, an investor can make decisions which could be risky and lead to financial losses.

About the author

The author is a British neo-Keynesian theorist and considered as one of the most influential economists of the XXth century.

Financial concepts related to the quote

It is important to understand the risks associated with investing before making any investment decisions. It is also important to diversify your portfolio by investing in a variety of different assets, to minimize the risk of losses due to the failure of any single investment. Additionally, investors should consider their investment goals, time horizon, and risk tolerance when making investment decisions. Some common risks associated with investing include:

Market Risk: The possibility of losing money due to the fluctuations in the stock market, commodity prices, or interest rates.
Credit Risk: The risk of losing money when a borrower fails to repay a loan or debt.
Inflation Risk: The risk that the purchasing power of your investments will decrease due to inflation.
Liquidity Risk: The risk that an investment cannot be sold quickly enough to avoid a loss.
Operational Risk: The risk of losing money due to errors, fraud, or other operational problems.

My opinion about this quote

I like this quote because today, many successes such as the Pinduoduo investment story about investment are shared (see the article “five investing success stories from five international women”), but without the proper knowledge and understanding of the risks, the loss that can occur is often underestimated.

Why should I be interested in this post?

As many business students are advised to invest early in their careers, and many are offered the chance to do it with money that they did not earn by themselves, this quote shall remind them of the consequences of bad decision making and the risks.

Useful resources

4 Real Risks Of Investing (And What To Do About Them)

Five Investing Success Stories from Five International Women

Pin Duo Duo

About the author

The article was written in March 2023 by Clara PINTO (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2022-2023).