High-frequency trading

High-frequency trading?(HFT) is a type of algorithmic financial trading characterized by high speeds, high turnover rates, and high order-to-trade ratios that leverages high-frequency financial data and electronic trading tools.[1]?While there is no single definition of HFT, among its key attributes are highly sophisticated algorithms, co-location, and very short-term investment horizons.[2]?HFT can be viewed as a primary form of?algorithmic trading?in?finance.[3][4]?Specifically, it is the use of sophisticated technological tools and computer algorithms to rapidly trade?securities.[5][6][7]?HFT uses proprietary trading strategies carried out by computers to move in and out of positions in seconds or fractions of a second.[8]

In 2017, Aldridge and Krawciw[9]?estimated that in 2016 HFT on average initiated 10–40% of trading volume in equities, and 10–15% of volume in foreign exchange and commodities. Intraday, however, the proportion of HFT may vary from 0% to 100% of short-term trading volume. Previous estimates reporting that HFT accounted for 60–73% of all US equity trading volume, with that number falling to approximately 50% in 2012 were highly inaccurate speculative guesses.[10][11]?High-frequency traders move in and out of short-term positions at high volumes and high speeds aiming to capture sometimes a fraction of a cent in profit on every trade.[6]?HFT firms do not consume significant amounts of capital, accumulate positions or hold their portfolios overnight.[12]?As a result, HFT has a potential?Sharpe ratio?(a measure of reward to risk) tens of times higher than traditional?buy-and-hold?strategies.[13]?High-frequency traders typically compete against other HFTs, rather than long-term investors.[12][14][15]?HFT firms make up the low margins with incredibly high volumes of trades, frequently numbering in the millions.

A substantial body of research argues that HFT and electronic trading pose new types of challenges to the financial system.[5][16]?Algorithmic and high-frequency traders were both found to have contributed to volatility in the?Flash Crash of May 6, 2010, when high-frequency liquidity providers rapidly withdrew from the market.[5][15][16][17][18]?Several European countries have proposed curtailing or banning HFT due to concerns about volatility.[19]