High frequency trading

A subset of algorithmic trading distinguished by three characteristics rather than by any single one: holding periods measured in seconds or fractions of a second, a very high ratio of messages sent to trades actually done, and a position book that is usually flat by the end of the session. The strategies themselves are conventional in kind, chiefly continuous two-sided quoting, statistical arbitrage between correlated instruments, and arbitrage between the same instrument on venues that update at different speeds.

What is distinctive is the infrastructure. Servers are placed in the same data centre as the venue's matching engine, market data arrives on direct feeds rather than consolidated ones, order logic is often committed to hardware rather than software, and microwave links are used between cities because light travels faster through air than through glass. No legal definition exists in most jurisdictions, so supervisors identify the activity by proxies such as message rates, colocation and the lifetime of resting orders.

For anyone dealing on a retail platform the practical relevance is not competition on speed, which is not a contest that is entered, but the fact that fast automated participants are a large part of who is quoting on the other side, which is one reason a displayed price can update and vanish within milliseconds. The effect of the activity is genuinely disputed. A substantial body of research finds narrower quoted spreads and more continuous quoting since it became widespread; the standing objection is that quotes withdrawn the instant a large order appears are not liquidity in any useful sense, and episodes of very fast intraday dislocation are cited on both sides of that argument.