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What is High-Frequency Trading (HFT)?
High-Frequency Trading (HFT) is a type of algorithmic trading that uses ultra-fast computers, advanced models, and high-speed data networks to execute thousands of trades in fractions of a second. HFT aims to capitalize on tiny price discrepancies across markets.
Definition
High-Frequency Trading is the automated execution of large numbers of orders at extremely high speeds, often within microseconds.
Key Takeaways
- Relies on speed, algorithms, and minimal latency.
- Profits from small, short-lived price inefficiencies.
- Has a major influence on market liquidity and volatility.
Understanding High-Frequency Trading (HFT)
HFT firms invest heavily in cutting-edge infrastructure—co-located servers, fiber-optic cables, microwave towers—to reduce latency. Algorithms scan markets for price mismatches, arbitrage opportunities, or order-flow patterns, executing trades instantly.
While HFT can increase liquidity and tighten bid-ask spreads, critics argue that it creates unfair advantages, increases systemic risk, and may contribute to flash crashes.
Regulators continue to monitor HFT activity to maintain fair, stable markets.
Real-World Example
During the 2010 Flash Crash, HFT algorithms amplified rapid price swings, revealing how deeply embedded algorithmic trading had become in modern markets.
Importance in Business or Economics
HFT affects:
- Market liquidity
- Price efficiency
- Volatility during high-stress periods
- Market microstructure research
Types or Variations
- Arbitrage-Based HFT — Exploits price differences across markets.
- Market-Making HFT — Provides liquidity via rapid buy/sell orders.
- Momentum/Signal HFT — Responds to short-term patterns.
Related Terms
- Algorithmic Trading
- Market Microstructure
- Arbitrage
Sources and Further Reading
- U.S. SEC Market Structure Reports
- Investopedia: https://www.investopedia.com/terms/h/high-frequency-trading.asp
Quick Reference
- Ultra-fast automated trading
- Uses algorithms and low-latency infrastructure
- Influences liquidity and volatility
Frequently Asked Questions (FAQs)
Is HFT legal?
Yes, though heavily regulated in most countries.
Does HFT benefit markets?
It can improve liquidity but may increase systemic risk.
Do individual investors use HFT?
No, HFT requires large capital and specialized infrastructure.
