High-frequency trading
Also known as: HFT
High-frequency trading uses powerful computers and specialized software to execute enormous numbers of trades in fractions of a second, far faster than any human trader could react. Firms engaged in high-frequency trading typically hold positions for extremely short periods, sometimes just seconds or less, profiting from tiny, repeated price movements or from providing across many trades rather than from a longer-term view on a 's value.
These firms invest heavily in speed itself, sometimes placing their servers physically as close as possible to an exchange's own computers to shave fractions of a millisecond off how quickly they can see prices and respond, a practice known as colocation. High-frequency trading strategies include acting as an informal by constantly posting buy and sell quotes to capture the , and identifying and acting on tiny, fleeting price discrepancies between related securities or between different trading venues faster than anyone else can.
High-frequency trading is a significant share of total US volume, and it is a regular subject of debate. Supporters argue it narrows and adds that benefits all investors. Critics argue it can worsen during stressed markets and gives certain firms a structural speed advantage that ordinary investors can never match. For a typical , high-frequency trading is mostly invisible day to day, its main practical effect shows up indirectly, in the tighter spreads and generally more liquid markets that high-frequency tends to produce.