What Does Jump Trading Mean, and Is It Worth It?

First of all, what do you know about jump trading? Let’s find out!

It refers to advanced trading strategies, which are undertaken by high-frequency trading (HFT) firms.

High-frequency trading firms apply various hedge fund strategies. For instance, merger arbitrage, index arbitrage, and others, trying to capitalize on the fast speed of technology, which enables HTF firms to connect to the trading floors of the exchanges instantly.

Furthermore, the fact that retail investors underperform the markets, enables them (HFT) firms to provide higher growth. In most cases, HFT firms are trying not to attract attention. It is worth mentioning that they aren’t willing to disclose their secrets.

Jump trading and HFT firms

As we already know jump trading is, now we can move on to high-frequency trading firms.

As stated above, such firms are reluctant to disclose their trading secrets. What else they don’t like? Let’s learn more about HFT firms.

Unsurprisingly, they work in the high-frequency trade (HFT) business. But how? They operate through a number of strategies in order to trade and earn money. As mentioned above, they utilize various strategies. It is worth mentioning that the strategies include various forms of statistical arbitrage, long/short equity, volatility arbitrage, etc.

We need to mention that such firms depend on a number of factors. For example, they rely on computer software, more precisely on the ultra-high speed of computer software as well as data access to significant resources.

In most cases, high-frequency trading firms utilize private money, as well as several private strategies in order to make money. Interestingly, it is possible to split such firms into several types, more precisely, three types.

Interesting details HFT firms

It makes sense to start with the most popular one. It is desirable to remember that the most widespread type of HFT firm, at least for now is the independent proprietary firm.

Proprietary trading is carried out with the HFT firm’s own money. A firm doesn’t use money that belongs to its clients. Unsurprisingly, the profits are for the above-mentioned firm, and for the external clients.

Now, let’s move on to the second type. We need to mention some high-frequency trading firms belong to broker-dealer firms.

The third type is also quite interesting. It is important to mention that such firms also function as hedge funds.

How do HFT firms make money?

Proprietary traders use various methods in order to make money for the firms they work for.

One source of income for such firms is that they get paid for providing liquidity by Electronic Communications Networks (ECNs) as well as some exchanges. Such firms also serve as market makers.

We can’t forget about risk factors as well. For example, HFT firms often face risks related to dynamic market conditions, software anomaly, regulations, etc. So, it is important to keep in mind that firms face various challenges.

In 2012, Knight Capital Group lost hundreds of millions of dollars in less than an hour after markets opened on August 12. The company lost $400 million due to a “trading glitch” triggered by an algorithm malfunction.