High-frequency trading (HFT)


    High-frequency trading (HFT) is a form of automated trading which uses algorithms to identify opportunities and rapidly execute a large number of orders.

    HFT is sometimes also referred to as “equity market making”.

    How does HFT work?

    HFT trading platforms can analyse many markets simultaneously and are programmed to process trades if market conditions are appropriate. The technology used is extremely advanced and involves incredibly fast processing speeds.

    HFT firms can execute a trade in microseconds and can handle thousands of transactions in a single day, often making a small amount of profit on each.

    HFT firms generally compete against each other as opposed to longer-term investors.

    The impact of high-frequency trading

    HFT has been going on since at least 1999, but its popularity increased dramatically between 2005 and 2009.

    Some experts say that HFT can add market liquidity and lower volatility, consequently improving trading conditions for other market participants. A number of exchanges even provide financial incentives for this liquidity provision.

    However, others have concerns about the risks of HFT and the way in which it can affect the stability of markets. They suggest that firms specialising in HFT should be subject to tighter regulation and risk controls.

    In 2010 HFT firms accounted for over 60% of all US equity trading volume, but that number fell to about 50% in 2012, with a reported overall reduction in profits.