what is high frequency trading hft 
high frequency trading hft is a trading method that uses powerful computer programs to transact a large number of orders in fractions of a second hft uses complex algorithms to analyze multiple markets and execute orders based on market conditions traders with the fastest execution speeds are generally more profitable than those with slower execution speeds hft is also characterized by high turnover rates and order to trade ratios understanding high frequency trading hft high frequency trading is a type of algorithmic trading traders are able to use hft when they analyze important data to make decisions and complete trades in a matter of a few seconds hft facilitates large volumes of trades in a short amount of time while keeping track of market movements and identifying arbitrage opportunities some of the key characteristics of high frequency trading include because of the complexities and intricacies involved with hft it isn t surprising that it is commonly used by banks other financial institutions and institutional investors it became popular when exchanges started to offer incentives for companies to add liquidity to the market for instance the new york stock exchange nyse has a group of liquidity providers called supplemental liquidity providers slps that attempts to add competition and liquidity for existing quotes on the exchange 1the slp was introduced following the collapse of lehman brothers in 2008 when liquidity was a major concern for investors as an incentive to companies the nyse pays a fee or rebate for providing said liquidity with millions of transactions per day this results in a large amount of profits 2some of the best known hft firms include tower research capital citadel llc and virtu financial advantages and disadvantages of hftthe main benefit of high frequency trading is the speed and ease with which transactions can be executed banks and other traders are able to execute a large volume of trades in a short period of time usually within seconds hft has improved market liquidity and removed bid ask spreads that would have previously been too small this was tested by adding fees on hft which led bid ask spreads to increase one study assessed how canadian bid ask spreads changed when the government introduced fees on hft it found that market wide bid ask spreads increased by 13 and retail spreads increased by 9 3hft is controversial and has been met with some harsh criticism it has replaced a number of broker dealers and uses mathematical models and algorithms to make decisions taking human decisions and interaction out of the equation decisions happen in milliseconds and this could result in big market moves without reason as an example on may 6 2010 the dow jones industrial average djia suffered what was then its largest intraday point drop declining 1 000 points and dropping 10 in just 20 minutes before rising again a government investigation blamed a massive order that triggered a sell off for the crash 4an additional critique of hft is it allows large companies to profit at the expense of the little guys its so called ghost liquidity is also a source of criticism the liquidity provided by hft is available to the market one second and gone the next preventing traders from actually being able to trade this liquidity large volume of transactions at onceeasy and speedy processimproves market liquidityremoves small bid ask spreadsremoves human decision making and interactionspeedy transactions could result in major market movestraders can t trade liquidity