Glossary
High-frequency trading (HFT)
Automated trading that uses very fast computers and data links to place and cancel large numbers of orders in fractions of a second.
On this page
High-frequency trading (HFT) is a style of automated trading in which firms use powerful computers, co-located servers and the fastest available data connections to send, modify and cancel very large numbers of orders, holding positions for seconds or less. HFT firms are among the largest participants in modern stock, futures and currency markets. They matter to ordinary investors because they supply much of the quoted liquidity that sets the bid-ask spread you pay.
How it works
Speed is measured in microseconds. Firms rent space in exchange data centers (co-location) so their servers sit physically next to the matching engine, buy direct exchange data feeds rather than relying on the slower consolidated feed, and use microwave links between Chicago and New Jersey to shave time off futures-to-stock signals. Common strategies include:
- Electronic market making: continuously quoting bids and offers and earning the spread plus exchange rebates.
- Arbitrage: exploiting tiny, fleeting price differences between related instruments, such as an ETF and its holdings, or the same stock on two venues.
- Short-term statistical strategies that react to order-book changes.
Debate
Supporters credit HFT competition with narrowing spreads and lowering trading costs since the 2000s. Critics point to "phantom" liquidity that vanishes in stress, an arms race in speed that rewards a few firms, and episodes such as the May 6, 2010 Flash Crash, when the Dow fell almost 1,000 points intraday before rebounding. Regulators responded with tools including single-stock circuit breakers and, later, Limit Up-Limit Down bands.