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Definition: high-frequency trading


Buying and selling large quantities of stocks in split seconds, and making pennies or fractions of a penny 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 with other high-frequency traders 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 within the same datacenter as the stock exchange computers or as close by as possible. In the most extreme example, to shave off nanoseconds, a fiber optic line was laid in the straightest line possible between Chicago and New Jersey (between the Chicago futures exchange and the New York stock exchanges).

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 99% of its trades. They claim traders make billions per year 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 assert that this form of trading will turn the market into greater chaos in the future. See high-frequency crypto trading.