A brief overview of High Frequency Trading

High Frequency Trading is a type of algorithmic trading used by large

investment banks, hedge funds and institutional investors which utilizes
powerful computers to transect a large number of orders at an extremely
high speed.

High Frequency Trading has taken place since 1999, after electronic exchange
was authorized by U.S. Securities and Exchange Commission in 1998.
However it wasn't until the start of 2010 that the HFT trades only had a
execution time in terms of milliseconds because of the advent of
sophisticated and fast computer technology.

The infamous Flash Crash of May 6 2010 where high frequency liquidity
providers rapidly withdrew from the market had led to controversies
surrounding HFT. Since then, regulators from around the World had started to
propose to put restrictions on HFT.

HFT traders make use of different strategies to profit from high frequency
trading. To name a few: market making, statistical arbitrage and low-latency
strategies which leverage structural difference in the market.

HFT has made a deep impact on the market despite its recent inception.

Positive impact on the market includes increased liquidity, as HFT firms

contribute to over 50% of the equity turnover in some major markets.

Narrower spread was also observed since the use of algorithms and
computers in trading which resulted in the prices of the securities being
updated more frequently and more accurately.

Moreover, HFT increases fees for exchange because HFT has led to a
significant increase in trading volume, and thus an increase in transaction
fees and revenues for the exchanges and ECNs(electronic communication
networks).

Negative impact includes increased volatility as the trading positions are only
held for minutes or even seconds in HFT. It can give rise to price fluctuation
and volatility.

HFT traders often cancel a lot of trading orders. Fake orders are often used to
determine the price other investors are offering. It can artifically alter the
price of a security, profiting high frequency traders in the expense of other
counter-parties.

HFT threatens market integrity through exacerbating information

asymmetries and disadvantage buy-side and small market players.

Regulators have introduced measures to investigate market abuses related to

high frequency trading in an attempt to prevent another flash crash from
happening.

Despite the uncertainty in the regulations, firms will continue to leverage

technology advancement in order to make greater profits. HFT is a natural
step in the evolution of the market. Efforts are required to minimize its
negative impact.

source:

http://www.investopedia.com/ask/answers/09/high-frequency-
trading.asp

https://www.capgemini.com/resource-file-
access/resource/pdf/High_Frequency_Trading__Evolution_and_the_Future.pdf