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A cryptocurrency market offers multiple opportunities to the traders and investors, but these opportunities are not accessible to every person in the market. High-frequency trading allows the regular investors especially the beginners to take benefit of the market opportunities that are normally out of their reach.

Decentralized exchanges (DEXs) also gained momentum in the finance and crypto sector with the increase in hype of the Decentralized financial (DeFi) protocol in the year 2020. Users can easily get the access to the token of their choice as the DEXs are considerably less regulated than the centralized exchanges.

The decentralized exchanges prevent frauds because of being non-custodial in nature. Before hitting any major exchanges, the high-frequency traders can earn major profit on coins. This is a detailed article to explain the readers that how high-frequency trading operates on the decentralized exchanges and how they can gain benefit from it.

What is High-Frequency Crypto Trading?

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The use of complex algorithms for the analysis of huge amount of data is termed as high-frequency trading (HFT). This is a trading method that facilitates in carrying out faster trade processes. Just in seconds, multiple markets can be analyzed, and larger orders can be executed easily using the high-frequency trading. In the trading sector, the only key of earning maximum profit is faster execution of processes.

By executing enormous volumes of trade faster, high-frequency trading eliminates the possibility of small bid-ask spread. Before the reflection of orders in the price book, the participants in the market could be benefited directly by the change in price. Therefore, even in a volatile market with high liquidity, the traders can earn profit using the HFTs.

Emerging from the traditional financial markets, high-frequency trading has made its place in the crypto markets. This is due to the improvements that have been made in the infrastructure high-frequency trading of the crypto exchanges. DEXs can be traded by using high-frequency trading in the crypto market. Many high-frequency trading firms such as the Financial Times, Trading and Hehmeyer, DV, DRW and Jump Trading are using these already.

HFTs made their way in the crypto domain naturally. The decentralized exchanges have several advantages over the normally practiced centralized exchanges. This is making them popular among the traders. Improved standards of privacy and regulation are some of them.

Many firms are also using high-frequency trading to produce huge profit by using the algorithmic trading in some hedge funds that are crypto focused. This provides an edge to the larger firms that is also condemned by many critics. If the high-frequency trading is made to be used over long terms, huge amount of profit could be generated by using them in a volatile. It just requires proper infrastructure and favorable market conditions.

Working of High-Frequency Trading on Decentralized Exchanges

Buying lower and selling higher is the basic idea behind the functioning of high-frequency trading. The patterns and trends are identified by the analysis of large volumes of data by the high-frequency trading. This is done to earn maximum profit using these trends. Any price trend is identified by the algorithm and a huge number of sell or buy orders are then executed in a fast manner to maximize the benefit gained out of it.

There is no specific definition of high-frequency trading used by the United States Securities and Exchange Commission. It provides five distinct attributes of high-frequency trading for better understanding

  • The orders are generated and executed by the use of high-speed and complex programs.
  • The use of colocation services that are offered by exchanges and other services to reduce the latencies and potential delays in the data flow.
  • Opening and closing the positions by using the short time frames.
  • Multiple orders are submitted and then cancelled right after confirming the submission.
  • By holding the positions for very short periods, the exposure to overnight risks is reduced.

It can be summed up that for the analysis of cryptocurrencies at a very high speed across all multiple exchanges, the sophisticated algorithms are used by high-frequency trading. They have a significant edge over the human traders because of the speed at which they operate. What makes high-frequency trading algorithms versatile is that they can carry out trade at multiple exchanges over the same time or over the different classes of assets.

The trading triggers and trends that cannot be observed easily by the naked eye are detected by high-frequency trading algorithms. It proves helpful when a lot of positions are to be opened operating at high speeds. With the identification of new goals, to be the first one in line is the ultimate goal of using high-frequency trading.

The price is normally moved, when a long or short position on cryptocurrency is opened by a bigger investor. The profit is quickly booked by the high-frequency trader by carrying out the trade in an opposite direction hence cancelling out these price movements.

As most of the digital assets are traded on decentralized exchanges, this makes it easier to carry out high-frequency trading. The infrastructure of these exchanges differs from the traditional ones, making it possible for them to operate at higher trading speeds. As split-second decision making, and execution is required for operating high-frequency trade as it provides an ideal environment resultantly.

Therefore, at every second, a number of traders are executed by the high frequency traders in order to generate and collect a good amount of profit.

Some of the Top High-Frequency Trading Strategies

There are a number of high-frequency trading strategies that could be mentioned but some of them are traditionally used and are very common among the investors.

The traditional trading techniques used in the market where the cutting edge of IT abilities is considered as an advantage, high-frequency trading also operates on the same idea. The traders can get benefited from the opportunities in the market by adopting the fundamental ways that high-frequency trading offer.

However, it is to be kept in mind that high-frequency trading itself is a strategy, therefore the traders should focus on the analysis of those techniques that use high-frequency trading technology instead of focusing on high-frequency trading as a whole.

  • Crypto Arbitrage

When there is a difference in the price of different cryptocurrencies on different exchanges, profit could be earned easily by taking advantage of this difference. This method is called crypto arbitrage. The traders that earn profit from these inconsistencies in the market are known as arbitrageurs.

This could be understood by the example as if the price of Bitcoin is $30,000 at one platform and it costs $30,500 on the second platform. It creates an opportunity for the consumer to buy it from the first platform and at the same time sell it at the second one. This helps in earning profit on immediate basis in a short period of time.

The traders can easily earn the profit before anyone else by taking advantage of this discrepancy in the market. This also facilitates in balancing the prices in market, further helping in the stability of the market. In addition to that, discovering multiple arbitrage opportunities, HFT makes the trade process faster than the human trader for about hundreds of times.

The arbitrage strategies could be conducted in a very short time span usually less than a second, therefore it provides high benefit to the arbitrageurs as they can earn maximum profit out of it. By using the robust computer systems, high-frequency trading system can quickly scan the market so that they can seize all the opportunities that it is providing at that time.

  • Market Making

Market making is another commonly used trading strategy. Buying and selling orders are placed simultaneously due to security reasons. The profit is gained from the bid-ask spread method that is actually the difference between the bid and ask prices. The ask price is the one at which one is willing to pay for the asset and the bid price is that at which one is willing to sell the asset.

Market makers are actually the large companies that are known for traditional trading. These companies provide good orders and ensure liquidity in the market. Market quality is guaranteed by linking the market makers to a cryptocurrency exchange. However, there are some market makers that have no agreement with the exchange platforms. These market makers use their algorithms and earn profit from the spread gained.

Working of market making strategy: The market makers buy and sell their cryptocurrencies all the time and keep on changing their bid-ask spreads so that they can earn profit from each and every trade being carried out even it is small. To understand this, consider an example that if one buys bitcoin from someone who is selling his crypto holdings at $37,000 that is the ask price for it and then he sells it further at $37,003 that is now his bid price.

The profit that is earned by the difference between the bid price and the ask price of the asset such as $3 here is the actual way the traders get to make money through it. In certain circumstances, when the difference between the ask and the bid prices becomes insignificantly large, this could result in huge profits from the day trading if carried out in larger volumes.

This spread compensates the prices for the market makers in case of any potential risk that is attached with market strategies. It becomes easier for the buyers and the sellers to trade at considerable prices by providing the required liquidity to the market.

  • Short Term Opportunities

For buy and holders and for swing traders, high-frequency trading is not suitable. It mostly benefits the one who want to earn money on short term fluctuations in prices. The high-frequency traders take immediate action in the situation of price fluctuation. The prices sometimes do not get enough time to be adjusted before the traders act again in such scenario.

In case, a cryptocurrency is dumped by a whale, this results in the decrease in the price of that particular currency for some time unless the market again reaches the demand and supply balance for that currency. This may last for only few minutes or sometimes seconds even but any traditional trader may suffer a loss in such condition.

However, the high-frequency traders can still get benefited from such situation and earn capital. They know that the market will move to stability slowly, they get the time to operate their algorithms.

  • Volume Trading

Volume trading is also one of the commonly used high-frequency trading strategy. In this strategy, the trades are carried out after tracking the number of shares that are being traded in a given period of time.

The basic idea is that as with the increase in the number of shares that are being traded, the liquidity of the market also increases. This makes the selling and buying of larger number of shares easier for the traders without following any considerable movement in the market.

In simpler words, it can be said that to get benefited from the liquidity conditions in the market is the basic purpose of volume trading.

  • Pinging Strategy

This is the high-frequency trading strategy that is used to trace out the price range of a particular asset following any large participant in the market. A few seconds are consumed by the verification cycle and using the robust hardware systems, high-frequency trading can carry out millions of these traces every minute. By determining the sale and buy places beforehand, the trader gets a certain advantage over the other participants.

This method is usually used in the dark pools that may be some private exchanges or forums and is beneficial for the larger market makers.

What are the Advantages of High-Frequency Trading?

  • Accuracy

As high-frequency trading is carried out by using the algorithmic calculations, it eliminates the possibility of any human error driven by emotions or fear. The results of high-frequency trading are always accurate as it only depends on mathematical calculations.

  • Automation and Speed

The feasibility and the faster speed of the process is the greatest advantage of high-frequency trading. It consists of no involvement of nay human. The process is carried out by the strong hardware systems that facilitate in carrying out thousands of transactions every second.

  • Liquidity Provision

Another benefit of high-frequency trading is that it provides the required liquidity to the market and helps in maintaining the stability of the market overall. Moreover, it also helps in tracing out the prices and place of the market activity beforehand.

What are the Challenges Faced in High-Frequency Trading?

Dealing with the high-frequency trading can also result in some significant challenges for the traders. Some of the disadvantages that are to be considered while dealing with high-frequency trading in the crypto market are mentioned below.

  • Higher Risk-to-Reward Ratio

Where the possibility to gain profit is high in high-frequency trading, the risk of risk-to-reward ratio is also significantly higher. This can be simply understood as there is a probability that a trader can earn a huge profit out of high-frequency trading or loss a lot suddenly too.

  • Possibility of Scams

In the high-frequency trading there are chances that the trader operates a false algorithm or falls in the trap of any faulty algorithm provided by any other entity. This can result in great loss.

  • Illicit Activities

Another threat integrated with the high-frequency trading is falling for the false and illicit situations created by scammers. They may create a ghost liquidity situation or increase the prices for very short term to trap the traders. One has to stay aware of such scams and cybercrimes.

Criticism Over High-Frequency Trading

Since the inception, the critics and professionals are talking about the high-frequency trading. They have created certain objections against the use of high-frequency trading in the market. According to the critics, high-frequency trading helps the owner to hide their billion-dollar income from other people or investors.

Moreover, the traders who are practicing high-frequency trading carry out most of their transaction of mutual funds. These funds usually contain the pension savings of the normal citizens that put those citizens at a loss as the high-frequency traders take all their money. The biggest concern of the critics is that in case the algorithm fails; this can result in the fall of the market.

Where High-Frequency Trading Can be Tried?

In some past recent years, multiple high-frequency trading exchanges are engaging with the decentralized currencies and this number is increasing with time. DV Trading, Hehmeyer Trading and Jump Trading are some of them. Moreover, ErisX and Gemini are some of the firms that are providing collocation as for cryptocurrency exchanges. Coinbase and HitBTC are providing specific tools required for high-frequency trading.


The high-frequency trading can be used by the investors in order to turn the unfavorable conditions in their favor. high-frequency trading should be deployed in the market for using the market opportunities in a better way. High-frequency trading allows the traders to carry out a large number of transactions within no time. This can result in gaining out maximum profit in the trade procedure during even smallest market fluctuations.

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Nathan Ferguson

By Nathan Ferguson

Nathan Ferguson is a talented crypto analyst and writer at Herald Sheets, dedicated to delivering comprehensive news and insights on the ever-evolving digital currency landscape. With a strong background in finance and technology, Nathan's expertise shines through in his well-researched articles and thought-provoking analysis. He holds a degree in Economics from the University of Chicago, and his passion for cryptocurrency drives him to stay up-to-date with the latest industry trends and developments.