High Frequency Trading Explained

 What is high frequency trading?

High-frequency trading, also known as HFT, is a method of trading that uses powerful computer programs to transact a large number of orders in fractions of a second. ... Typically, the traders with the fastest execution speeds are more profitable than traders with slower execution speeds.

If you're an average human being, your eyes take around 400 milliseconds to blink once. High-frequency trading is a kind of market activity that moves in less than one millisecond to spot and take advantage of an opportunity to buy or sell. It happens through trading algorithms, programs that determine how to trade based on fast-moving market data.

The kind of profit opportunities that high-frequency trading looks for aren't the things most investors ever think about. They're not betting that technology companies will see their profits grow more quickly than expected, for example, or that a recession is coming.

Instead, they're looking for tiny opportunities for arbitrage. Imagine that, at precisely 10:30:01.01 AM, a share of Bank of America's stock was trading at $16.02 on the New York Stock Exchange - but it was $16.04 on a smaller exchange called BATS. A high-frequency trading computer might spring into action by buying up shares of stock on the New York Stock Exchange and selling them on BATS. To make money this way you need to move super-fast, because the opportunity could vanish at any moment.