high-frequency trading
A computerized trading strategy that executes a large number of orders at extremely high speeds, exploiting tiny price discrepancies across markets in milliseconds.
Example
“High-frequency trading firms capture fractions of a cent on millions of trades per day, adding up to hundreds of millions in annual profit.”
Memory Tip
HFT = trading at the SPEED OF LIGHT. Computers executing thousands of trades per second.
Why It Matters
High-frequency trading affects all investors because these strategies can impact market prices and volatility even if you are not directly participating. Understanding how automated trading works helps you recognize that markets move based on computer algorithms, not just human decision-making, which can influence when and how you execute your own trades.
Common Misconception
Many people believe that high-frequency traders are simply faster versions of regular day traders trying to make money the same way. In reality, high-frequency trading exploits microscopic price differences that regular traders cannot even see or access, operating in a completely different timeframe where profits are measured in fractions of cents across thousands of trades per second.
In Practice
A high-frequency trading firm might notice that stock ABC is trading for 50.10 dollars on one exchange and 50.11 dollars on another exchange. Their computer system automatically buys 10,000 shares at 50.10 dollars and instantly sells them at 50.11 dollars, capturing a 0.01 dollar profit per share, or 100 dollars total, in just milliseconds before the price discrepancy disappears.
Etymology
HIGH (extreme) FREQUENCY (rate, speed) TRADING. Trading at EXTREMELY HIGH FREQUENCY — thousands of times per second.
Common Misspellings
Trade stocks, options & crypto commission-free
Related Terms
More in trading
Other trading terms you should know
See Also
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.