High-frequency trading HFT is a program trading platform that uses powerful computers to transact a large number of orders at very fast speeds. It uses complex algorithms to analyze multiple markets and execute orders based on market conditions. Typically, the traders with the fastest execution speeds are more profitable than traders with slower execution speeds.
As an incentive to companies, the NYSE pays a fee or rebate for providing said liquidity. With millions of transactions per day, this results in a large amount of profits.
The SLP was introduced following the collapse of Lehman Brothers in , when liquidity was a major concern for investors. The major benefit of HFT is it has improved market liquidity and removed bid-ask spreads that previously would have been too small. This was tested by adding fees on HFT, and as a result, bid-ask spreads increased.
HFT is controversial and has been met with some harsh criticism. It has replaced a large amount of broker-dealers and uses mathematical models and algorithms to make decisions, taking human decision and interaction out of the equation.
Decisions happen in milliseconds, and this could result in big market moves without reason. A government investigation blamed a massive order that triggered a sell-off for the crash.
An additional critique of HFT is it allows large companies to profit at the expense of the "little guys," or the institutional and retail investors. Another major complaint about HFT is the liquidity provided by HFT is "ghost liquidity," meaning it provides liquidity that is available to the market one second and gone the next, preventing traders from actually being able to trade this liquidity.
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Become a day trader. Benefits of HFT The major benefit of HFT is it has improved market liquidity and removed bid-ask spreads that previously would have been too small. Get Free Newsletters Newsletters.More...