What is High Frequency Trading

High frequency trading is a very fast method of trading that uses computers that are programmed to extract large volumes of information in order to facilitate many orders in a short space of time. Multiple markets can be studied and scanned with lightning speed accuracy and the user of high frequency trading thus has an advantage over the usual market analysts. This method of trading is often favoured by institutional investors, large investment banks and hedge funds and often results in impressive returns for investors as market trends and shifts can be pinpointed and followed with razor sharp accuracy.  There are some who believe that the use of high frequency trading in the markets is immoral in practise as it tends to give one a distinct advantage over smaller investors. 

In order to carry out the brisk data analysis required by high frequency trading programs, the user needs to acquire the fastest and most efficient computer systems and programs available. One is only as fast as the speed of the latest technology and many find that they are beaten to market profits by those who can afford to update to faster technologies and more efficient systems of data analysis. In effect, high frequency trading brings the level of success that it does as the user is able to outwit other investors by processing essential market information at a rate that overtakes and exceeds that of other players in the market. 

Most high frequency trading systems use a system of complex algorithms in order to extract and process the required investment based information and statistics. The algorithms are mathematical methods that allow a computer system to solve problems in a certain number of planned steps; these programmed problem solvers allow the investor to make very small profits but at regular and repeating intervals. The volume of trading done in a single day can be a staggering amount and regular high frequency traders often sell off their entire portfolios in the space of a trading session – quick fire profit making through rapid information sifting is the key.

The method of high frequency trading has only really been around since the late 1990’s. Usual human based market calculations are far exceeded by computerized methods and may include specific models of trading, listed as: market making, event arbitrage, ticker tape trading and high-frequency statistical arbitrage – all effective and extremely fast moving in calculations but also thought to cause market volatility and a certain unevenness in stock market trading.