Definition
High-Frequency Trading (HFT)
High-frequency trading is a subset of algorithmic trading characterised by extremely high order submission rates, very short holding periods and reliance on ultra-low-latency infrastructure to capture tiny, fleeting price discrepancies.
HFT firms in India typically co-locate their servers inside the NSE or BSE data centre to shave microseconds off the round-trip to the matching engine. Strategies include market making, latency arbitrage between correlated instruments, and rapid order-book-based trading. Profits per trade are minuscule but are multiplied across enormous volumes.
SEBI scrutinises HFT closely because of fairness concerns. Measures such as co-location audits, a tick-by-tick data feed available to all co-located members, and randomisation/throttling proposals are intended to level the playing field. HFT is also a major contributor to the order-to-trade ratio that exchanges monitor and penalise when excessive.
Related terms
- Co-locationCo-location is the practice of placing a trading member's servers physically inside or immediately adjacent to the exchange's data centre so that orders reach the matching engine with the lowest possible latency.
- Latency ArbitrageLatency arbitrage is a strategy that profits from being faster than other participants to act on the same information, capturing price differences between venues or instruments before they realign.
- Tick-by-Tick Data FeedA tick-by-tick (TBT) data feed broadcasts every order book event, additions, modifications, cancellations and trades, in real time, giving the most detailed live view of market microstructure.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.