High-Frequency Trading
AdvancedHigh-frequency trading (HFT) is a type of automated trading that uses powerful computers and very fast connections to execute large numbers of trades in fractions of a second, often holding positions for very short periods.
High-frequency trading firms use algorithms to analyse market data and place, modify and cancel orders at extremely high speeds, measured in microseconds. They often place their servers close to exchanges’ computers, known as co-location, to reduce delays.
Common strategies include market making, providing buy and sell quotes and profiting from the spread; arbitrage, exploiting tiny price differences between related securities or venues; and reacting quickly to news or order flow.
For example, an HFT firm might notice that a share’s price on one exchange is slightly lower than on another and buy and sell almost instantly to capture the difference.
HFT accounts for a large share of trading volume in many markets. Supporters argue it improves liquidity and narrows spreads, lowering costs for other investors. Critics argue it can increase volatility, disadvantage slower investors and contribute to sudden market disruptions, such as the 2010 flash crash. Regulators require HFT firms to have risk controls and keep detailed records.
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