High-Frequency Trading

High frequency trading (HFT) is a form of algorithmic trading that uses very fast computers, low latency connections and sophisticated software to trade large numbers of orders in fractions of a second. HFT firms typically hold positions for seconds or less, end the day with little inventory and earn tiny profits on each trade, adding up across millions of trades. HFT firms are major liquidity providers in modern markets, and their role has been debated since the 2010 Flash Crash and the 2014 book "Flash Boys".

Key characteristics#

Main HFT strategies#

The speed race#

HFT firms compete on latency, the time it takes to receive data, decide and send orders:

• Co location: placing servers inside exchange data centres. See Co-Location.
• Microwave and laser networks: between Chicago and New York, microwave links cut round trip times compared with fibre, because signals travel faster through air than glass.
• Hardware acceleration: FPGAs and specialised network cards. See FPGAs and Hardware Acceleration.
• Kernel bypass and optimised software. See Kernel Bypass and Low-Latency Networking.

Effects on markets: the evidence#

Criticisms and regulation#

• Phantom liquidity: quotes that disappear when needed.
• Speed advantage fairness: Michael Lewis's "Flash Boys" (2014) argued that some HFT strategies took advantage of slower investors.
• Manipulative practices: spoofing and layering are illegal; several traders and firms have been prosecuted. See Spoofing and Layering.
• Responses: speed bumps (such as IEX's 350 microsecond delay), order to trade ratio limits, minimum resting times and circuit breakers in some markets.

Can individuals do HFT?#

Realistically, no. True HFT requires large investments in technology, exchange connectivity and market data, plus specialised talent. Individual traders compete better at longer horizons where speed matters less. See Day Trading and Swing Trading.

Frequently asked questions#

What is high frequency trading?#

A form of algorithmic trading that uses extreme speed to trade very large numbers of orders, holding positions for seconds or less and earning small profits per trade.

Is high frequency trading good or bad for markets?#

Evidence is mixed: HFT has been linked to tighter spreads and more liquidity in normal times, but critics argue liquidity can vanish in stress and that speed gives unfair advantages.

Can retail traders compete with HFT?#

Not on speed. Retail traders do better with strategies at longer horizons where milliseconds do not matter.

Next, learn how algorithms are built and tested in Developing, Testing and Monitoring Algorithms.