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Definition: high-frequency trading


Buying and selling large quantities of stocks in split seconds, and making pennies per share. High-frequency trading (HFT) is performed entirely by computer algorithms that look for and take advantage of small price discrepancies of the same stock on different exchanges. HFT computers are constantly bidding and offering 100-share lots of thousands of different stocks to determine moment-to-moment prices. In addition, traders can spoof the market by placing large sell orders, cancel them milliseconds later and immediately buy the stocks at a lower price, which they caused by injecting negativity into the market.

High-frequency traders compete among each other all day long. In order to profit, the buys and sells must be executed immediately, and the shorter transmission pathways between orders and executions make the difference. To speed up the process, high-speed traders locate their computers either within the stock exchange datacenter, as close as possible or connected to the shortest line in between (see Spread Networks).

Extremely Controversial
Proponents claim high-frequency trading is simply an advanced form of algorithmic trading like all the other widely used financial formulas. High-frequency traders also claim their systems make a more uniform market and have a stabilizing effect.

Opponents claim HFT is downright deceitful, making money by executing software that makes profits on nearly all of its trades. They claim traders make billions without contributing any value to society. In the Flash Crash of May 6, 2010, the Dow swung 1,000 points within minutes. Regulators reported that high-frequency trading exacerbated market volatility after the sale of unusually large futures contracts. Had the event occurred at a different time of day, the effects might have gone global. Opponents believe HFT can cause even greater havoc in the future. See high-frequency crypto trading.




The High-Frequency Trading Tell-All
In his 2014 book, Michael Lewis explains how the entire stock market is rigged in favor of computerized trading. In the most extreme example, to shave off milliseconds, a fiber optic line was laid in the straightest line possible between two exchanges hundreds of miles apart.