HFT, known as High-Frequency Trading, is the process of using computer programs running complex algorithms to make trades very quickly.
HFTs employ market making, arbitrage, and/or momentum trading strategies by detecting or predicting changes in the depth and direction of institutional order flow.
HFT can be viewed as a primary form of algorithmic trading in finance.
It is the use of computer algorithms and sophisticated technological tools to rapidly trade financial securities.
High-frequency traders use proprietary trading strategies carried out by computers to move in and out of positions in seconds or fractions of a second, dealing in very high volumes at the same time.
High-frequency traders can conduct trades in 10 milliseconds or less. It takes between 300 to 400 milliseconds for you to blink your eye.
Automation makes all this possible. Their automated systems allow traders to scan markets for information and respond faster and than any human.
HFT executes trades with the kind of speed and volume that is physically impossible by a human.
Trades are completed in the time it would take for a human brain to process the new data appearing on a screen.
It can be used to either find the best price for a single large order or to find opportunities for profit in the market in real-time.
The algorithms behind high-frequency trading tend to be extremely complex, allowing the program to trade across several markets at once as conditions are met.
The advantage of HFT is largely down to how quickly the platform can process trades, so the focus is on the power of computers used and the location of computing programs.
By placing themselves nearby to the exchanges taking orders, HFT firms can gain millisecond advantages over their rivals.
Typically, the traders with the fastest execution speeds are more profitable than traders with slower execution speeds.
The major benefit of HFT is it has improved market liquidity and tighter bid-ask spreads.
There are two primary criticisms of HFT.
- HFT allows institutional players to gain an upper hand in trading because they are able to trade in large blocks through the use of algorithms.
- The liquidity produced by this type of trading is ephemeral. It disappears within seconds, making it impossible for traders to take advantage of it.