Cost of capital and High frequency trading: Difference between pages

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''Investment - rate of return.''
(HFT).


Broadly, the rate of return on a firm’s investments which is required to service the providers of the firm’s capital.
Trading activities using sophisticated technological tools and computer algorithms that generate a large number of daily trades at very fast speeds.  


Often the term is used in a more specific sense to refer to the weighted average cost of capital of a business.
Typically at the end of the day there is no open position in the market.




For example if a firm's cost of capital is 8%, it must earn a return of at least 8% on its operational investments in order to provide the investors with the minimum investment return of 8% which they require.
Characteristics attributed to HFT are:


#Extraordinarily high speed using sophisticated computer programs for generating, routing, and executing orders;
#Use of co-location services and individual data feeds offered by exchanges and others to minimize network and other types of time delays;
#Very short time-frames for establishing and liquidating positions;
#The submission of numerous orders that are cancelled shortly after submission;
#Ending the trading day in as flat a position as possible.


The concept of cost of capital is important because when inferior rates of return are earned from operational investments - for example only 5% compared with a cost of capital of 8% - such operations are destructive of shareholder value and need to be improved or discontinued.


The results of these operations may appear (wrongly) to be profitable, when considered in simplistic historical cost financial accounting terms.
==See also ==
* [[Algorithmic trading]]
* [[Computer based trading]]
* [[Day trading]]
* [[Investment horizon]]


 
[[Category:Identify_and_assess_risks]]
== See also ==
[[Category:Financial_products_and_markets]]
* [[Capital]]
[[Category:Technology]]
* [[Capital structure]]
* [[Discount rate]]
* [[Discounted cash flow]]
* [[Gearing]]
* [[Opportunity cost]]
* [[Opportunity cost of capital]]
* [[Shareholder value]]
* [[Tax shield]]
* [[Weighted average cost of capital]]
 
 
=== Other resources ===
[[Media:2015_11_Nov_-_Balancing_act.pdf| Balancing act, The Treasurer, 2015]]
 
[[Category:Corporate_finance]]

Latest revision as of 14:18, 9 July 2022

(HFT).

Trading activities using sophisticated technological tools and computer algorithms that generate a large number of daily trades at very fast speeds.

Typically at the end of the day there is no open position in the market.


Characteristics attributed to HFT are:

  1. Extraordinarily high speed using sophisticated computer programs for generating, routing, and executing orders;
  2. Use of co-location services and individual data feeds offered by exchanges and others to minimize network and other types of time delays;
  3. Very short time-frames for establishing and liquidating positions;
  4. The submission of numerous orders that are cancelled shortly after submission;
  5. Ending the trading day in as flat a position as possible.


See also

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