Everything You Need to Know About High-Frequency Trading

High-frequency trading (HFT) has become increasingly popular in big corporations. This algorithmic, automated approach has made big money for traders, and has caused waves in many markets. Some have had so much success that economists fear the consequences HFT could have on global economies.

HFT should sound tempting to casual and serious traders alike. But what is it, how does it work, and should you really get involved?

What is high-frequency trading?

High-frequency trading is an automated trading platform that uses algorithms to make mass orders at extremely high speeds. It is generally used by investment banks and hedge funds, which can utilise huge amounts of money.

HFT systems scan and analyse multiple markets and exchanges simultaneously, and execute millions of orders accordingly – exponentially more than man could manage alone. They spot trends and recognise shifts in the markets in milliseconds. Institutions who use HFT therefore gain a huge advantage in the markets, making members big money.

When did it start?

HFT started in or before 1999, as electronic exchanges were authorised in 1998. Since then, it has become increasingly quick, and entered into the mainstream. By 2009, HFT accounted for as much as 73% of equity trades, despite HFT firms comprising just 2% of the market. In 2010, the stock market suffered a “flash crash” – a brief but severe crash, thought to be caused by HFT firms pulling out en masse. This brought HFT into the spotlight, and raised questions over whether it is ethical. Debates still rage on with some wanting HFT to be restricted. As of yet, no plans have been made to do so.

Hedge funds

High-frequency trading has become popular for hedge funds. A hedge fund uses pooled funds to make a large number of trades. It is usually administered by a professional management firm, which makes decisions based on the level of risk and resources available. Since hedge funds make major funds accessible, HFT is made possible and is seen as a quick way to make fast money.

Commercial high-frequency trading

The big HFT firms tend to be very secretive, so as to limit competitors and keep their edge. This is a factor in many financiers’ resistance to HFT. They see it as unethical, pushing smaller corporations out of the market.

There are, however, companies which take on clients, offering “trading software”. They then engage in HFT with these clients’ money. Any commercial companies offering this bot technology to retail audiences should cause immediate suspicion. If they had really “cracked the algorithm” they would not be letting others in willy-nilly, instead trading with their own money. This would make them far more money than selling it off to clients.

Worldwide HFT corporations

The following 10 companies are some of the major HFT firms operating across the globe:

Chopper Trading: a Chicago trading firm founded back in 2002. They have advanced the scope of their technologies, opening offices around the US and London. They look to recruit top traders, and have a strong culture of social responsibility. Trades in every major asset class and a wide variety of strategies and holding periods.

Tradebot: a Kansas based firm trading with over 5,000 companies each month. Their focus is advanced technology. Tradebot spin-off, BATS Global Markets, has become the 3rd largest stock market in the US. Trade in stocks in the US and Canada.

Geneva Trading: founded in 2009 in Dublin, Ireland, Geneva Trading has an office in Chicago which facilitates its investment in other markets. They pride themselves on supporting entrepreneurship and providing opportunities.

GSA Capital Partners: formed in 2001 within Deutsche Bank, GSA is a London based firm. Trade in liquid equities, futures, and Forex markets.

Maven Securities: a relatively new, small firm founded in London in 2011. It has ten employees, and provides great employment opportunities with huge payment packages. Specialises in proprietary trading and market making.

IMC: probably the oldest HFT firm, having been founded back in 1989. It has had almost 3 decades to vastly improve its trading technology. IMC started in the Netherlands and has expanded across the globe. Buys and sell securities covering all major asset classes, and is also a Designated Market Maker on the New York Stock Exchange.

Virtu Financial: one of the very few HFTs to go public. Virtu Financial is very secretive regardless, with its offices in New York, Dublin, Singapore, and Austin maintaining a small public presence. Trades in numerous exchanges and electronic marketplaces in equities, fixed income, currencies and commodities.

RSJ Algorithmic Trading: a Prague-based firm founded in 1994. Traditionally trades interest rate futures and is one of the biggest participants on the futures exchange NYSE Liffe.

Flow Traders: founded in Amsterdam in 2004. Flow Traders has a relatively large workforce of over 200 employees, with offices in Asia and the US. Considered a leading market maker in exchange-traded funds.

KCG: a giant in the HFT world, with 1,045 employees worldwide. However, revenues as well as headcounts have been decreasing over the past few years. Trades in the odd bond, securities and equities markets.

Going international with HFT

It is mostly big companies and hedge funds that succeed with HFT, and many choose to go international, opening up offices around the world. However, international expansion comes with its own hurdles. Stocks must be bought with domestic currency, and for HFT, that means firms need large reserves of foreign currency to trade abroad. This can make a firm very vulnerable, as with a huge turnover, currency fluctuations can eat away at their profits. Millions can be lost with small changes in the exchange rate. Companies must show caution to the wind when making this call, or they will be blindsided by unexpected fluctuations.

On the other hand, this situation has created an untapped market in which some of the big firms can have a huge advantage. The problems caused by holding large reserves of foreign capital with changing exchange rates can be resolved by direct access to a bank’s trading system. Big companies should have this access. Smaller companies, on the other hand, can use commercial hedging services to offset any losses caused by rate changes.


High-frequency trading has become a huge mover in nearly every market. Successful HFT firms have made immense amounts of money this way, causing some to questions its potentially harmful impact on the markets. HFT is limited almost exclusively to big corporations and hedge funds. Commercial companies who offer HFT as an open service to clients are necessarily misleading – legitimate HFT firms keep their algorithms secret so as not to flood the markets.

When HFT companies choose to expand globally, they face the need for large reserves of foreign currency. Since turnover is so huge, small exchange rate changes can mean big losses. With direct access to a bank’s trading account, the larger corporations can overcome this problem. Smaller companies have the opportunity to take advantage of commercial hedging services like the ones mentioned on this market overview,  to resolve this.

The following quotes on the future of HFT come from industry experts.

“HFTs won’t need that super speed to get ahead of the little guy or even institutional traders, but to get ahead of other HFTs. Some of the loudest complaints about high-frequency trading come from the slower traders who used to win the races.”

Clifford Asness, AQR Capital Management

“The idea that retail investors will lose out to sophisticated speed traders is an old claim in the debate over HFT, and it’s pretty much been discredited. Speed traders aren’t competing against the ETrade guy, they’re competing with each other to fill the ETrade guy’s order.”

Mathew Philips, Bloomberg BusinessWeek

“HFTs will facilitate price efficiency by trading in the direction of permanent price changes and in the opposite direction of transitory price errors, both on average and on the highest volatility days.”

Philip Delves Broughton, New York Times