High-Frequency Trading (HFT)

Intermediate

High-Frequency Trading (HFT) is a type of algorithmic trading that involves transacting a large number of orders in fractions of a second. HFT leverages high-frequency financial data and sophisticated electronic trading tools to analyze markets and execute a large number of orders within short timeframes.

High-frequency traders move in and out of trades at a rapid pace, aiming to capture small amounts of profit each time that, over time, aggregate into a substantial sum of profit. Typically, the algorithms with faster execution speeds have an advantage over algorithms with slower execution speeds.

HFT can improve market conditions as it provides a constant flow of liquidity and potentially removes high bid-ask spreads. Due to this positive impact on the markets, some exchanges incentivize HFT by offering rebates or reduced fees for HFT providers.

On the other hand, HFT can significantly increase the volatility of the markets as algorithms can make decisions in the span of milliseconds without any human interaction.

HFT is also a controversial trading method because the liquidity it provides can appear and disappear extremely rapidly, preventing other traders from being able to take advantage of it.

It is estimated that HFT algorithms are responsible for a considerable amount of the trading volume in the global markets. Due to the complexity of these algorithms, typically only large financial institutions have access to this trading method.

Related Glossaries

Algorithm

A sequence of unambiguous instructions used for the purpose of solving a problem.

Buy Wall

A single huge buy order or the composition of multiple large buy orders at the same price in the order book...

Bid-Ask Spread

The difference in price between the lowest asking price and highest bid price on the order book for an asset

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