According to San Francisco Chronicle’s Tim Parker, If you are an investor, high-frequency trading (HFT) is a part of your life even if you don’t know it. You have likely purchased shares offered by a computer or sold shares purchased and then instantly sold by another computer. HFT is controversial. Traders disagree with each other and studies contradict other studies, but regardless of the opinions, what is most important is how HFT affects your money.
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What Is HFT?
HFT is a broader term for various trading strategies that involve buying and selling financial products at extremely high speeds. Computers can identify market patterns and buy or sell these products in a matter of milliseconds based on algorithms or “algos.”
One strategy is to serve as a market maker where the HFT firm provides products on both the buy and sell sides. By purchasing at the bid price and selling at the ask price, high-frequency traders can make profits of a penny or less per share. This translates to big profits when multiplied over millions of shares.