High Frequency Trading (HFT)
High frequency trading or black-box trading refers to the practice of using very sophisticated trading algorithms in conjunction with servers that are co-located in the data centres of exchanges in order to achieve as low latency a connection to the order book as possible.
The practice is conducted by high-tech hedge funds and other institutions seeking an edge over other market participants.
The trading algorithms used by the high frequency trading HFT firms are incredibly sophisticated, able to deploy capital and act on changing market trends in fractions of a second. These types of algos essentially scan markets for market inefficiencies and quickly move to fill them.
They are able to trade at timeframes that human traders can’t even fathom, placing thousands of orders in incredibly small timespans.
Criticisms of HFT include the practice of “spoofing”, where thousands of limit orders can be created, moved around and pulled as suddenly as they are entered.
These orders create the illusion of demand which entices other, less sophisticated flesh and blood traders to enter positions that they have been goaded into by the algos.