[1][2][3] While there is no single definition of HFT, among its key attributes are highly sophisticated algorithms, co-location, and very short-term investment horizons in trading securities.
[23] On September 2, 2013, Italy became the world's first country to introduce a tax specifically targeted at HFT, charging a levy of 0.02% on equity transactions lasting less than 0.5 seconds.
[23] As of the first quarter in 2009, total assets under management for hedge funds with high-frequency trading strategies were $141 billion, down about 21% from their peak before the worst of the crises,[26] although most of the largest HFTs are actually LLCs owned by a small number of investors.
[29] The Bank of England estimates similar percentages for the 2010 UK market share, also suggesting that in Europe HFT accounts for about 40% of equity orders volume and for Asia about 5–10%, with potential for rapid growth.
[33] According to SEC:[34] A "market maker" is a firm that stands ready to buy and sell a particular stock on a regular and continuous basis at a publicly quoted price.
[10] Automated Trading Desk (ATD), which was bought by Citigroup in July 2007, has been an active market maker, accounting for about 6% of total volume on both the NASDAQ and the New York Stock Exchange.
For example, a large order from a pension fund to buy will take place over several hours or even days, and will cause a rise in price due to increased demand.
In these strategies, computer scientists rely on speed to gain minuscule advantages in arbitraging price discrepancies in some particular security trading simultaneously on disparate markets.
[31] Especially since 2011, companies involved in HFT have massively invested in microwaves infrastructure to transmit data across key connections such as the one between New York City and Chicago but also between London and Frankfurt, going through Belgium thanks to a network of former US army antennas.
The growing quote traffic compared to trade value could indicate that more firms are trying to profit from cross-market arbitrage techniques that do not add significant value through increased liquidity when measured globally.
The report found that the cause was a single sale of $4.1 billion in futures contracts by a mutual fund, identified as Waddell & Reed Financial, in an aggressive attempt to hedge its investment position.
"[15] The joint report "portrayed a market so fragmented and fragile that a single large trade could send stocks into a sudden spiral", that a large mutual fund firm "chose to sell a big number of futures contracts using a computer program that essentially ended up wiping out available buyers in the market", that as a result high-frequency firms "were also aggressively selling the E-mini contracts", contributing to rapid price declines.
[15] The joint report also noted "HFTs began to quickly buy and then resell contracts to each other – generating a 'hot-potato' volume effect as the same positions were passed rapidly back and forth.
"[58] As computerized high-frequency traders exited the stock market, the resulting lack of liquidity "...caused shares of some prominent companies like Procter & Gamble and Accenture to trade down as low as a penny or as high as $100,000".
[13] In the years following the flash crash, academic researchers and experts from the CFTC pointed to high-frequency trading as just one component of the complex current U.S. market structure that led to the events of May 6, 2010.
The market then became more fractured and granular, as did the regulatory bodies, and since stock exchanges had turned into entities also seeking to maximize profits, the one with the most lenient regulators were rewarded, and oversight over traders' activities was lost.
In an April 2014 speech, Berman argued: "It's much more than just the automation of quotes and cancels, in spite of the seemingly exclusive fixation on this topic by much of the media and various outspoken market pundits.
"[96] The Chicago Federal Reserve letter of October 2012, titled "How to keep markets safe in an era of high-speed trading", reports on the results of a survey of several dozen financial industry professionals including traders, brokers, and exchanges.
By March 2011, the NASDAQ, BATS, and Direct Edge exchanges had all ceased offering its Competition for Price Improvement functionality (widely referred to as "flash technology/trading").
[100] The fine resulted from a request by Nasdaq OMX for regulators to investigate the activity at Octeg LLC from the day after the May 6, 2010, Flash Crash through the following December.
[109] Reported in January 2015, UBS agreed to pay $14.4 million to settle charges of not disclosing an order type that allowed high-frequency traders to jump ahead of other participants.
The SEC stated that UBS failed to properly disclose to all subscribers of its dark pool "the existence of an order type that it pitched almost exclusively to market makers and high-frequency trading firms".
UBS broke the law by accepting and ranking hundreds of millions of orders[111] priced in increments of less than one cent, which is prohibited under Regulation NMS.
[116] In November 7, 2019, it was reported that Tower Research was ordered to pay $67.4 million in fines to the CFTC to settle allegations that three former traders at the firm engaged in spoofing from at least March 2012 through December 2013.
The HFT firm Athena manipulated closing prices commonly used to track stock performance with "high-powered computers, complex algorithms and rapid-fire trades", the SEC said.
Broker-dealers now compete on routing order flow directly, in the fastest and most efficient manner, to the line handler where it undergoes a strict set of risk filters before hitting the execution venue(s).
Ultra-low latency direct market access (ULLDMA) is a hot topic amongst brokers and technology vendors such as Goldman Sachs, Credit Suisse, and UBS.
Such performance is achieved with the use of hardware acceleration or even full-hardware processing of incoming market data, in association with high-speed communication protocols, such as 10 Gigabit Ethernet or PCI Express.
Brad Katsuyama, co-founder of the IEX, led a team that implemented THOR, a securities order-management system that splits large orders into smaller sub-orders that arrive at the same time to all the exchanges through the use of intentional delays.
[125] Outside of US equities, several notable spot foreign exchange (FX) trading platforms—including ParFX,[126] EBS Market,[127] and Refinitiv FXall[128]—have implemented their own "speed bumps" to curb or otherwise limit HFT activity.