High-Frequency Trading (HFT) (2024)

An algorithmic trading characterized by the high speed of trading, extremely large number of transactions and very short-term investment horizon

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High-frequency trading (HFT) is algorithmic trading characterized by high-speed trade execution, an extremely large number of transactions, and a very short-term investment horizon. HFT leverages special computers to achieve the highest speed of trade execution possible. It is very complex and, therefore, primarily a tool employed by large institutional investors such as investment banks and hedge funds.

High-Frequency Trading (HFT) (1)

Complex algorithms that are used in high-frequency trading analyze individual stocks to spot emerging trends in milliseconds. It will result in hundreds of buy orders to be sent out in a matter of seconds, given the analysis finds a trigger.

Advantages of High-Frequency Trading

High-frequency trading, along with trading large volumes of securities, allows traders to profit from even very small price fluctuations. It allows institutions to gain significant returns on bid-ask spreads.

Trading algorithms can scan multiple markets and exchanges. It enables traders to find more trading opportunities, including arbitraging slight price differences for the same asset as traded on different exchanges.

Many proponents of high-frequency trading argue that it enhances liquidity in the market. HFT clearly increases competition in the market as trades are executed faster and the volume of trades significantly increases. The increased liquidity causes bid-ask spreads to decline, making the markets more price-efficient.

A liquid market sees less risk associated with it, as there will always be someone on the other side of a position. Also, as liquidity increases, the price a seller is willing to sell for, and a buyer is willing to pay for will move closer together.

The risk can be mitigated with several strategies – one of which is stop-loss order, which will ensure that a trader’s position will close at a specific price and prevent further loss.

Risks of High-Frequency Trading

High-frequency trading remains a controversial activity and there is little consensus about it among regulators, finance professionals, and scholars.

High-frequency traders rarely hold their portfolios overnight, accumulate minimal capital, and establish holding for a short timeframe before liquidating their position.

As a result, the risk-reward, or Sharpe Ratio, is exceptionally high. The ratio is much greater than the classic investor who invests with a long-term strategy. A high-frequency trader will sometimes only profit a fraction of a cent, which is all they need to make gains throughout the day but also increases the chances of a significant loss.

One major criticism of HFT is that it only creates “ghost liquidity” in the market. HFT opponents point out that the liquidity created is not “real” because the securities are only held for a few seconds. Before a regular investor can buy the security, it’s already been traded multiple times among high-frequency traders. By the time the regular investor places an order, the massive liquidity created by HFT has largely ebbed away.

Furthermore, it is supposed that high-frequency traders (large financial institutions) often profit at the expense of smaller players in the market (smaller financial institutions, individual investors).

Finally, HFT has been linked to increased market volatility and even market crashes. Regulators have caught some high-frequency traders engaging in illegal market manipulations such as spoofing and layering. It was proven that HFT substantially contributed to the excessive market volatility exhibited during the Flash Crash in 2010.

Ethics and Market Impact

Some professionals criticize high-frequency trading since they believe that it gives an unfair advantage to large firms and unbalances the playing field. It can also harm other investors that hold a long-term strategy and buy or sell in bulk.

Critics also suggest that emerging technologies and electronic trading starting in the early 2000s play a role in market volatility. Small and large crashes can be amplified by such technologies mass liquidating their portfolios with specific market cues.

Some European countries want to ban high-frequency trading to minimize volatility, ultimately preventing adverse events, such as the 2010 US Flash Crash and the Knight Capital collapse.

Algorithms can also be created to initiate thousands of orders and canceling them seconds later, creating a momentary spike in price. Taking advantage of such a type of deception is widely considered immoral and sometimes illegal.

Related Readings

CFI offers the certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

  • Investing: A Beginner’s Guide
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  • Trading Mechanisms
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High-Frequency Trading (HFT) (2024)


Is HFT trading profitable? ›

Advantages of High-Frequency Trading

Even if there are small price fluctuations, investors can make hefty profits using HFT strategies through the bid-ask spreads. Increased Opportunities High-frequency trading involves powerful computers and software that can scan and analyse multiple markets simultaneously.

How does HFT trading work? ›

High-frequency trading is an automated trading platform that large institutions use to transact many orders at high speeds. HFT systems use algorithms to analyze markets and spot emerging trends in a fraction of a second.

Is HFT trading legal? ›

In India, the legal and regulatory framework governs HFT activities. The Securities and Exchange Board of India (SEBI) has implemented regulations to ensure fair and orderly markets, including guidelines on co-location facilities, algorithmic trading, and risk management.

Is HFT illegal and unethical? ›

But HFT can be Used Unethically

HFT can give traders an unfair advantage if they engage in market manipulation. HFT computers can influence the market for the trader's own advantage.

What is the highest paid HFT? ›

The highest-paying job at Hft is a Senior Software Engineer with a salary of ₹60,31,200 per year (estimate).

Is it hard to get into HFT? ›

Getting into a high-frequency trading (HFT) company can be highly competitive, and it's important to have a strong understanding of computer science, programming, and finance. To be content with what you earn, it's important to have realistic expectations and to focus on personal growth and development.

Can individuals do HFT? ›

Another concern about HFT is that it gives an unfair advantage to large financial institutions over individual investors. Individual, small investors are at a disadvantage because they lack the resources and speed to process information as efficiently as high-frequency trading computers.

What is the average return on HFT? ›

The exact average return on HFT is difficult to pinpoint, as HFT firms generally keep their detailed trading strategies and performance metrics private. However, most estimates put the average yearly return from HFT strategies between 5-15%, with the top firms generating returns of 20% or more in good years.

Do brokers allow HFT? ›

Yes, high-frequency trading is legal. That being said, it's possible that high-frequency trading strategies will not be permitted by your broker.

Why is HFT controversial? ›

HFT is complex algorithmic trading in which large numbers of orders are executed within seconds. HFT adds liquidity to the markets and eliminates small bid-ask spreads. HFT is criticized for allowing large companies to gain an upper hand in trading.

What are the risks of HFT? ›

Risks of High-Frequency Trading

The ratio is much greater than the classic investor who invests with a long-term strategy. A high-frequency trader will sometimes only profit a fraction of a cent, which is all they need to make gains throughout the day but also increases the chances of a significant loss.

Who is the owner of HFT? ›

Eric Smidt is the owner and CEO of Harbor Freight Tools which he co-founded with his father, Allan Smidt, in 1977.

How do HFTs make money? ›

HFT makes extensive use of arbitrage, or the buying and selling of a security at two different prices at two different exchanges. Although the strategy can be extremely risky, even a small difference in price can yield big profits.

Which prop firms allow HFT? ›

High-Frequency Trading: Best Prop Firms allowing HFT 2024
  • FunderPro.
  • OspreyFX.
  • True Forex Funds.

Is HFT front running illegal? ›

Front running is prohibited since the front-runner profits come from nonpublic information, at the expense of its own customers, the block trade, or the public market.

Can you make money with high-frequency trading? ›

High-frequency trading strategies

Although the strategy can be extremely risky, even a small difference in price can yield big profits. HFT algorithms can detect very small differences in prices faster than human observers and can ensure that their investors profit from the spread.

Is high-frequency trading a good career? ›

Is high frequency trading a good career choice for programmers? - Quora. If you don't mind a work environment that's significantly more stressful and fast-paced than most other programming/SWE jobs, then sure. The pay is great (250k+) and most people would find the work is very interesting.

How much do high-frequency trading firms make? ›

As of May 11, 2024, the average hourly pay for a High Frequency Trading Firms in the United States is $36.54 an hour.

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