Understanding High-Frequency Trading (HFT).

High-frequency trading is a type of algorithmic trading. Traders are able to use HFT when they analyze important data to make decisions and complete trades in a matter of a few seconds. HFT facilitates large volumes of trades in a short amount of time while keeping track of market movements and identifying arbitrage opportunities.

Some of the key characteristics of high-frequency trading include:

• Trading at high speeds

• A large number of transactions executed

• Short-term investment horizons

Because of the complexities and intricacies involved with HFT, it isn't surprising that it is commonly used by banks, other financial institutions, and institutional investors.

It became popular when exchanges started to offer incentives for companies to add liquidity to the market. For instance, the New York Stock Exchange (NYSE) has a group of liquidity providers called supplemental liquidity providers (SLPs) that attempts to add competition and liquidity for existing quotes on the exchange. The SLP was introduced following the collapse of Lehman Brothers in 2008 when liquidity was a major concern for investors. As an incentive to companies, the NYSE pays a fee or rebate for providing said liquidity. With millions of transactions per day, this results in a large amount of profits.