High frequency trading (HFT) is a type of computer-driven trading that happens at extremely high speed. Trades are placed and canceled in tiny fractions of a second, often thousands or millions of times per day. The goal is to make tiny profits on huge numbers of trades that add up to big money.
How Fast Is It Really?
We are talking about speeds measured in microseconds (millionths of a second) and even nanoseconds (billionths of a second). A human blink takes about 300,000 microseconds. Many high frequency trades happen in less than one microsecond. That is faster than most people can even press a button.
Who Does High Frequency Trading?
The main players are:
- Specialized high frequency trading firms (Virtu, Citadel Securities, Jane Street, Tower Research, Jump Trading, etc.)
- Big investment banks that have their own HFT desks
- Some large hedge funds
These companies hire physicists, mathematicians, and computer scientists more than traditional “Wall Street” people.
How Do They Make Money?
There are several common strategies:
- Market Making
They continuously offer to buy and sell stocks (or other assets) at slightly different prices. They try to capture the small difference (the “spread”) between the buy and sell price, thousands of times a day. - Arbitrage
They look for tiny price differences for the exact same thing in different places (for example, a stock on the New York Stock Exchange vs. another exchange) and buy low on one, sell high on the other, almost instantly. - Momentum / Order Flow Anticipation
They use super-fast computers to spot when a big order is coming into the market and try to get in front of it or ride the wave. - Statistical Arbitrage
They find pairs or groups of stocks that usually move together and trade when they temporarily drift apart, betting they will come back together.
What Makes High Frequency Trading Possible?
- Speed
The fastest firms place their computers right inside or next to the stock exchanges (called co-location) so their signals travel only a few feet instead of miles. - Direct Data Feeds
They pay extra for the fastest possible price data, often microseconds ahead of what regular investors see. - Powerful Algorithms
Everything is decided by computer programs; no human is in the loop for individual trades. - Very Low Costs
Exchanges give big rebates (kickbacks) to firms that add a lot of buy and sell orders, even if many orders are canceled.
What Do They Actually Trade?
Mostly:
- Stocks
- Stock options
- Exchange-traded funds (ETFs)
- Futures contracts (oil, gold, indexes, etc.)
- Currencies (forex)
- Sometimes government bonds
Common Myths and Facts
Myth: High frequency traders cause huge crashes.
Fact: They sometimes make crashes worse by pulling out very quickly (like in the 2010 Flash Crash), but they didn’t cause the crash itself. Rules were added afterward to prevent that specific problem.
Myth: They only make money when the market goes up or down a lot.
Fact: Many HFT strategies actually make the most money on calm, normal days when they can capture spreads over and over.
Myth: Regular investors can’t compete.
Fact: That’s largely true for speed-based strategies, but most long-term investors don’t need to compete on speed.
Advantages of High Frequency Trading
- Makes buying and selling cheaper for everyone (tighter spreads mean you pay less when you trade)
- Adds huge amounts of liquidity (it’s easier to buy or sell big amounts quickly)
- Narrows price differences between exchanges
- Helps prices reflect new information almost instantly
Criticisms and Downsides
- Can feel like the little guy is at a disadvantage
- Huge amounts of money and brainpower go into a “zero-sum” game instead of creating real products
- Occasionally causes extreme short-term volatility (“flash” events)
- The canceled orders (most orders are canceled, not filled) can feel like “fake” quotes that disappear when you try to trade
How Big Is It?
At its peak around 2009-2010, HFT made up over 60% of all stock trading volume in the United States. Today it’s closer to 40-50% because more people do it and profit margins have shrunk.
Regulation
After the 2010 Flash Crash, regulators introduced:
- Circuit breakers that pause trading if a stock moves too much too fast
- Rules against obvious manipulation (spoofing, layering 2010 someone went to prison for it)
- Requirements for market makers to keep quoting even in tough conditions
- Ongoing debates about a tiny tax on each trade or limiting order cancellation rates
The Bottom Line
High frequency trading is basically a technology arms race. The winners are the firms that can react the fastest and process information with the lowest possible delay. Most of the time it makes markets more efficient and cheaper for ordinary investors, but it can also create moments of extreme weirdness and leaves many people feeling the system is “rigged” in favor of the fastest computers.
It’s not going away; it’s only getting faster.