Editor's note: This piece is the first segment in a series on
High Frequency Trading (HFTs)
HFT is the acronym that much of the trading community loves to
hate. If statistics are correct, it accounts for the overwhelming
majority of market volume every day. It's also so complex and
secretive that a relative few know how it works.
It's high frequency trading, or HFT. Here's some of what you
What is HFT?
It depends who you ask but everybody's definition has one fact
in common: Speed. A day trader that holds a stock for minutes is
slow compared to a high frequency trading firm (a computer) that
measures trades in microseconds, or one millionth of a
In its most basic form, a firm in the HFT business has created
a computer algorithm that trades on market inefficiencies.
Marketfy sponsored an HFT webinar
. During the session, one of the presenters demonstrated how the
S&P 500 futures contract reacted to news microseconds faster
than the SPDR S&P 500 (NYSE:
By taking advantage of that 'speed of light' inefficiency, the
trading firm could make (or lose) money-measured in pennies. By
running trades like this throughout the market day and collecting
rebates that come with being a market maker, HFT with the right
computer algorithm can generate large revenue.
View Marketfy's high frequency trade webinar
What is an algorithm?
The use of a special computer program (or algorithm) doesn't
necessary indicate high frequency trading. Nearly all Wall Street
participants, including retail investors, place limit and stop
orders that will buy or sell only when certain criteria are
HFT algorithms also apply certain criteria before making
trades but they do it on a faster and more sophisticated scale.
The computers that run HFT algorithms aren't out-of-the-box
desktop machines. They're supercomputers strategically placed to
shave off microseconds from the time the order is sent to the
time it reaches the exchange.
The algorithm is constantly being tweaked and changed to
maximize performance in changing market conditions. The success
of an HFT firm is largely based on the quality of the
Do I know the firms involved in HFT?
Goldman Sachs (NYSE:
) and Morgan Stanley (NYSE:
) are two of the well-known firms that reportedly operate HFT
desks, but many are hedge funds and other firms that operate
outside of the public eye.
What if I want to learn more?
This is the first of a multi-part series on high frequency
trading. Don't forget to view or webinar that took place on April
7, 2013. It's one hour full of in-depth information that every
trader should hear. The free webinar can be found on the
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