High-Frequency Trading (HFT)
Trading StylesQuick Definition
Algorithmic trading characterized by high speeds, high turnover rates, and high order-to-trade ratios.
Detailed Explanation
High-frequency trading uses powerful computers to transact a large number of orders at extremely fast speeds—often in microseconds. HFT firms use complex algorithms to analyze multiple markets and execute orders based on market conditions. Strategies include market making, arbitrage, and momentum trading. HFT accounts for a significant portion of equity market volume. While HFT provides liquidity and tightens spreads, it's controversial due to concerns about market fairness and flash crashes. Retail traders compete with HFT by focusing on longer timeframes where speed is less critical.
Real Trading Example
An HFT algorithm might execute thousands of trades per second, capturing tiny profits that add up to significant gains.