High frequency trading, often referred to as HFT, is typically described as ultra-high-speed algorithmic computerized trading. However, because of the ever-evolving nature of technology and the markets, it is difficult to determine a precise definition for high frequency trading as said definition could rapidly become obsolete. For the purposes of regulation, the Italian Securities and Exchange Commission defines it as trading at a minimum frequency of a trade every 0.5 seconds.
HISTORY & EVOLUTION OF HIGH FREQUENCY TRADING
Although high frequency trading is often equated to algorithmic trading, algorithmic trading was around long before the advent of HFTs. High frequency trading is one of the most visible byproducts of the technological advancements in the market and is indicative of a shift in the markets towards increasingly levels of automated trading. The earliest instances of high frequency trading can be traced back as far as 2000, which was right when a technological renaissance of sorts was occurring in the United States.
HFT has had varying degrees of market adoption. In the study conducted by the Technical Committee of the International Organization of Securities Commission, they observed highly positive correlations between HFT and robust market infrastructures, liquid and transparent markets, particular pricing schemes and small tick sizes. Vary degrees of adoption were also observed across asset classes, mainly depending on the liquidity of the instrument. Equity markets remain the primary stomping grounds for high frequency traders, with HFT also playing a role in the trading of ETFs, derivatives, currencies, and fixed income securities.
High frequency trading came under fire and intense media scrutiny following the “flash crash” of May 6, 2010, and with heightened levels of high frequency trading in the markets comes the attention of the public audience, regulators, and policymakers. This is evidenced by the sheer number of initiatives put forward by legislators around the world; from U.S. and Indian authorities setting up committees to better understand the impact high frequency trading has on markets and the economic and...