High-frequency trading, programs analyze market data to capture trading opportunities that may open up for only a fraction of a second to several hours.High-frequency trading uses computer programs and sometimes specialised hardware to hold short-term positions in equities, options, futures, ETFs, currencies, and other financial instruments that possess electronic trading capability.High-frequency traders compete on a basis of speed with other high-frequency traders, not long-term investors, and compete with each other for very small, consistent profits.As a result, high-frequency trading has been shown to have a potential Sharpe ratio thousands of times higher than the traditional buy-and-hold strategies. By 2010 high-frequency trading accounted for over 70% of equity trades taking place in the US and was rapidly growing in popularity in Europe and Asia. Aiming to capture just a fraction of a penny per share or currency unit on every trade, high-frequency traders move in and out of such short-term positions several times each day. Fractions of a penny accumulate fast to produce significantly positive results at the end of every day.High-frequency trading firms do not employ significant leverage, do not accumulate positions, and typically liquidate their entire portfolios on a daily basis.One financial industry source claims algorithmic trading, including high-frequency trading, substantially improves market liquidity.An academic study shows additional benefits, including lowering the costs of trading,increasing the informativeness of quotes,improved linkage between markets,and other positive spillover effects, at least in quiescent or stable markets; the authors of this study also note that "it remains an open question whether algorithmic trading and algorithmic liquidity supply are equally beneficial in more turbulent or declining markets...algorithmic liquidity suppliers may simply turn off their machines when markets spike downward.Also noteworthy is that HFT only takes place in markets that are already deemed liquid, hence calling its necessity into question.
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