High-Frequency Trading (HFT)

High-Frequency Trading (HFT) refers to a type of Algorithmic Trading that involves executing a large number of orders at extremely high speeds. It utilizes advanced technology and algorithms to analyze multiple markets and execute orders based on market conditions. HFT typically involves holding positions for very short periods, often seconds or milliseconds, to Capitalize on small price discrepancies. Traders using HFT strategies often leverage high-speed data feeds, co-location services (where trading servers are placed close to exchange servers), and sophisticated mathematical models.

Examples:

• A firm employs HFT to exploit Arbitrage opportunities between different exchanges, buying a Stock at a lower price on one exchange and simultaNeously selling it at a higher price on another.
• A trading algorithm detects a pattern in price movements and executes thousands of buy and sell orders within milliseconds to take advantage of micro-trends in the market.

Cases:

• The “Flash Crash” of May 6, 2010, was partly attributed to HFT, where rapid selling led to a sudden drop in Stock prices, causing market instability.
• In 2012, Knight Capital Group experienced a malfunction in its HFT software, leading to erroNeous trades and a loss of $440 million in just 45 minutes.