Fast, faster and fastest is the way computers have made, and remade, our lives. There may be no better example of how fast things have become — and the possible danger speed can bring — than by looking at high frequency trading in the markets.
So what is high frequency trading and how does it work? CNBC explains.
What is high frequency trading?
High frequency trading, often called by its acronym HFT, is the use of sophisticated technological tools and computer algorithms to trade securities on a rapid basis — and the emphasis is on very rapid.
HFT uses specific trading strategies that are carried out by computers. Unlike regular investing, an investment position in HFT may be held only for seconds,or even fractions of a second, with the computer trading in and out of positions thousands of tens of thousands of times a day.
HF traders compete on a basis of speed with other high-frequency traders — not long-term investors who look for opportunities over a period of weeks, months ,or years and compete for consistent profits.
With this speed and reach for higher profits comes higher risk, as high frequency trading has been shown to have a measure of reward per unit of risk thousands of times higher than the traditional buy-and-hold strategies.
The success of high-frequency trading is largely driven by the ability to simultaneously process volumes of information — something ordinary human traders cannot do. And specific algorithms designed for use in HFT are closely guarded by their owners.