High-frequency trading (HFT) refers to a specialised form of trading that uses computer programs called bots to execute multiple trades in fractions of a second. The aim of HFT is to take advantage of very small price changes with high volumes of orders to maximise returns. Bots are programmed to trade according to the broker’s instructions, such as placing orders when prices hit a certain level or when markets meet certain conditions.
HFT trading firms invest a lot of money into developing bots that can execute orders quicker than their competitors. The faster orders can be completed the more profitable orders tend to be. This leads to an arms race between trading firms trying to create bots that have faster execution speeds, pricing out smaller firms from the competition. Critics argue that this leads to instability for asset prices and promotes market manipulation.
Supporters of the practice argue that HFT adds greater liquidity to markets, allowing smaller traders to easily find buyers or sellers to fulfil their orders.