High-Frequency TradingHFT
High-frequency trading (HFT) is algorithmic trading at extremely high speed, holding positions for fractions of a second, usually by specialised firms.
High-frequency trading uses powerful computers to place and cancel huge numbers of orders in tiny fractions of a second. It is run mostly by specialised firms with fast connections to exchanges. Retail traders rarely do HFT, but they trade in markets shaped by it.
- Category
- Trading Strategies
- Reading time
- 3 min
- Also called
- HFT, High-speed trading, Low-latency trading
- Updated
HFT in plain words
High-frequency trading describes professional firms running very short-term strategies that send huge numbers of orders and trades every day.1
There is no official legal definition of the term.1
Speed is everything, so firms co-locate — put their servers right next to the exchange's matching engine.2
How an HFT firm operates
Build fast systems
Write automated rules that react in microseconds.
Get close to the exchange
Place servers next to the exchange's matching engine (co-location) to cut delays.2
Trade very often
Run very short-term strategies that send a high volume of orders.1
Manage inventory
Keep Exposure small and close flat at day end.
Control system risk
Plan for failures — a glitch at a firm or platform can spread across markets in unexpected ways.1
Follow local rules
Rules for fast and automated trading differ by country and by venue.
Worked examples
Example 1 — Market making
Small edgeA hypothetical HFT firm quotes both sides of a share and earns a tiny edge many times.
| Trades per day | Thousands |
| Average gain per trade | Very small |
The edge comes from volume — many tiny profits — not from big wins.1
Example 2 — System glitch
GlitchA hypothetical bug sends wrong orders for a few seconds.
| Duration | Seconds |
| Loss | Large |
Operational or systems failures at trading firms can be costly in seconds.1
Example 3 — Retail view
Different gameA hypothetical retail trader sees a very tight Bid-Ask Spread on a busy share.
| Spread | Very tight |
| Trader speed | Seconds, not microseconds |
Firms use servers placed close to a matching engine to facilitate high-frequency trading, a speed retail traders cannot match.2
HFT vs retail day trading
| Aspect | HFT | Retail day trading |
|---|---|---|
| Speed | Microseconds | Seconds to minutes |
| Orders | Huge numbers | A handful |
| Holding time | Fractions of a second | Minutes to hours |
| Main tool | Co-located servers | Charts and platforms |
Where HFT appears
Market making
Quoting a tight Bid-Ask Spread.
Liquidity provision
Adding Liquidity to busy markets.
Fast arbitrage
Capturing tiny price gaps across venues.
News reaction
Responding instantly to Earnings and data.
Advantages and disadvantages
Advantages
- Can narrow spreads in normal markets.
- Adds liquidity to busy markets.
- Highly disciplined, rule-based execution.
Disadvantages
- Needs costly technology.
- System failures can spread fast.
- Retail traders cannot compete on speed.
- Liquidity can vanish in stress.
Going deeper
Read as far as you need. Each level builds on the one before it.
What it is
Beginner
It is a style of very short-term, very high-volume trading, without any formal legal definition.1
Speed infrastructure
Intermediate
Co-location — servers placed beside the matching engine — is a core part of the setup.2
System risk
Advanced
System failures at trading firms or venues can do wide and unexpected damage.1 Oversight rules differ by country.
Common mistakes
Thinking retail can copy HFT
Speed and costs make that unrealistic.
Blaming HFT for every loss
Most losses come from your own plan.
Ignoring spread changes
Liquidity can thin out in stress.
Confusing HFT with all algo trading
Many algorithms are slow.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- HFT trades at extremely high speed.
- It places huge numbers of orders.
- Co-location cuts delays.
- System failures are a key risk.
- Rules differ by country.
Frequently asked questions
Can I do HFT from home?
Is HFT legal?
Does HFT hurt retail traders?
Further learning
- Liquidity
What HFT often provides.
- Bid-Ask Spread
Where HFT competes.
- Scalping
The human short-term cousin.
- Slippage
Why speed matters.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- U.S. Securities and Exchange Commission. Staff Report on Algorithmic Trading in U.S. Capital Markets (2020) (opens in a new tab) Checked .
- U.S. Commodity Futures Trading Commission. CFTC Glossary (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.