High-Frequency Trading
A form of algorithmic trading that uses powerful computers to execute thousands of orders per second, profiting from tiny price discrepancies at extremely high speed.
What is HFT?
High-frequency trading (HFT) is a subset of algorithmic trading characterized by extremely high order submission and cancellation rates, ultra-low latency execution measured in microseconds, and short holding periods typically lasting milliseconds to seconds. HFT firms co-locate their servers physically adjacent to exchange matching engines to minimize transmission delays. Strategies include market making, statistical arbitrage, latency arbitrage, and momentum ignition. HFT accounts for a significant portion of total US equity trading volume. Proponents argue HFT improves market liquidity and tightens bid-ask spreads; critics contend it creates an unfair speed advantage and can amplify market instability, as evidenced by the 2010 Flash Crash.
Example
Virtu Financial, one of the largest HFT firms, disclosed in its 2014 IPO filing that it had been profitable on all but one trading day out of 1,238 days — a remarkable record attributable to making tiny profits on millions of trades per day. Rather than making large directional bets, Virtu acts as an electronic market maker, capturing tiny bid-ask spread differences across millions of transactions at near-zero latency.