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The Rise of High-Frequency Trading (HFT): Impact on Market Stability and Liquidity


The Rise of High-Frequency Trading (HFT): Impact on Market Stability and Liquidity

The Rise of High-Frequency Trading (HFT): Impact on Market Stability and Liquidity

Vantage Updated by Updated Fri, October 13 04:51

High-frequency trading (HFT) and algorithmic trading (AT) make up the new wave of trading that have come to dominate in the past decade.  

In 2010, HTF was estimated to account for 56% of all trades in the U.S., and 38% of trading in Europe. Around the same time, HFT also grew in popularity in the Asia-Pacific, with around 45% of equities traded in Tokyo attributed to HFT, and around 26% of trades, on the Singapore Stock Exchange1.  

Furthermore, global adoption of HFT is expected to grow. One report estimated that the global HFT market reached USD$8,531.93 million in 2022. The market is expected to grow to USD$13,107.16 million by 2028 – a CAGR of 7.42% during the period2.  

Clearly, HFT (and for that matter, AT) is more than just a flash in the pan. But what is HFT, and how will it impact the market as it continues its inexorable rise?  

Understanding HFT and AT3

The latest in automated trading, High-Frequency Trading uses algorithms to scan for market opportunities and capitalise on them – all within a fraction of a second. In short, HFT is a specialised application of AT. But let’s back up a little bit.  

At the turn of the century, AT started becoming popular among traders, as investments poured into electronic communication networks that enabled trading of financial securities outside of regular exchanges. Instead of jostling about on the trading floor, traders (and also other individuals) can subscribe to these systems and enter orders electronically.  

This automation of the trading process brought about several benefits such as increased speed, lowered costs and lessened manual errors.  

A trio of factors – improvements in connectivity speeds, more powerful and sophisticated computer networks, and key regulatory changes – facilitated AT in increasing its capabilities, giving rise to a specialised extension that came to be known as HFT.  

Additionally, the world of automated trading extends beyond just HFT. There are countless forex robots available in MetaTrader 4 that traders can directly install and use. By opening a live account with Vantage today, you can tap into our state-of-the-art fibre optic network that connects our global servers, ensuring that your trades are executed securely, accurately, and instantly. 

How does HFT work?4

HFT relies on algorithms to make large trading transactions at high speeds – a fraction of a second or less. More than simply speedy execution of orders, HFT systems are capable of analysing the markets to spot emerging trends and imminent shifts – and then generating and executing corresponding orders at favourable bid-ask spreads.

Essentially, HFT is an automated trading platform that operates according to a set of rules (aka the algorithms). While HFTs are only as good as the rules programmed into them, their true edge lies in the speed at which they are able to analyse the market and make appropriate trades.  

HFT systems allow traders to anticipate and beat market trends, but the ability to do so doesn’t come cheap, of course. One reason is the need for data streams to be fed into the HFT system, which traders have to pay for.  

Hence, HFT is usually used by larger players, such as institutional investors, proprietary trading firms and hedge funds. However, these parties may gain favourable returns on trades they make by virtue of their bid-ask spread, resulting in significant profits. 

Features of HFT5

While there is no formal definition of HFT, there are certain common features to note. 

  • Use of extraordinarily high-speed and sophisticated programs for generating, routing, and executing orders 
  • Use of co-location services and individual data feeds offered by exchanges and others to minimise network and other latencies 
  • Very short timeframes for establishing and liquidating positions 
  • Submission of numerous orders that are cancelled shortly after submission 
  • Ending the trading day in as close to a flat position as possible (that is, not carrying significant, unhedged positions overnight) 

Benefits and criticisms of HFT 

HFT offers traders a clear advantage, but how does it impact the market? Well, like with any game-changing innovation, HFT can have positive and negative impacts. 

  1. How HFT benefits the market6

    1. Increased market efficiency  
      • The use of HFT has engendered increased market efficiency, characterised by quicker and more accurate reflection of market information in price action. This is due to HFT’s ability to enable the most recent prices to be updated with smaller time gaps. The use of HFT also results in cost reductions, which are passed on to individual retail investors who invest indirectly in the market via mutual funds. 
    2. Increased liquidity 
      • It has been observed that the higher trading volume allowed by HFT corresponds with heightened market liquidity. In certain markets, HFT contributes more than 50% of equity turnover by volume, playing a critical role in providing order flow, resulting in greater liquidity.  
    3. Narrower spreads 
      • As HFT enables prices to be updated with increased frequency and accuracy, this has helped to close the gap between bids and asks and allowed traders to be more competitive. A study from NYSE Euronext shows that quoted spreads from 2007 to 2009 were lower than those from 2002 to 2006, a period when HFT was relatively less common. 
  2. Potential drawbacks of HFT7

    1. Increased volatility
      • Since HFT drastically increases the number of intraday trades per day, this style of trading introduces price fluctuations and short-term volatility. This effect is exacerbated given the high popularity and volumes of HFT strategies. HFT may also involve making and cancelling trades instantly to trigger automated buying from other firms – a practice that some critics flag as possibly unethical.  
    2. Front-running of transactions
      • Another criticism of HFT is that some programmes look for repetitive trading patterns and intercept these transactions by buying them up at a slightly higher bid (an act known as front-running), before turning around to sell the same securities to the intercepted party at a markup. This is detrimental to the returns and costs of the affected party, often institutional investors.  
    3. Disadvantage to smaller investors
      • Retail investors and smaller traders are at a disadvantage compared to HFT operators, as they do not have the same ability to access specialised services such as co-location facilities and raw data feeds. HFT firms may also enter trades just for liquidity rebates, an act which does not add value to retail or long-term investors.  

The role of AI in HFT8 

To an outsider, HFT probably already seems like automatic trading carried out by robots. Hence, it’s not too far of a stretch that AI tools will soon be integrated with HFT to increase the capabilities of this style of trading. 

AI integration can increase the efficiency of HFT by using machine learning technology to better anticipate the best times to place trades. AI also can be trained on a wide range of historic data to better identify when prices are most likely to increase. The recommendation put forth by the AI module can then be instantly and seamlessly executed via HFT. 

On the flipside, AI-driven HFT strategies may increase the odds of market failure if too many traders end up using the same AI tools. Afterall, when trained on the same data sets, AI tends to come to the same conclusion. This can cause too many traders to end up on the same side of a trade – and not enough traders on the other side, making it more difficult for orders to be filled.  

The blend of AI and HFT promises a new frontier in trading. Stay ahead of the curve with Vantage’s cutting-edge trading platform and tools. Open a live account today and experience the future of trading with Vantage. 

Real-world examples of how HFT can impact the market  

  1. Flash Crash of 6 May 20109
    1. One of the most prominent examples of the tremendous ability of HFT to impact the market happened in 2010. In what is now known as the May 6th Flash Crash, the Dow Jones Industrial Average abruptly fell by nearly 1,000 points.  
    2. In a matter of minutes, household brands such as P&G, and GE saw hundreds of billions of dollars wiped off their share prices. Thankfully, the market soon corrected its course, and ended the day just 3% lower.  
    3. The culprit was found to be U.S. mutual fund Waddell and Reed, which investigators say instigated a USD$4.1 billion sell order. This resulted from the use of an automated algorithm trading system to sell e-minis contracts; the mayhem started when HFD systems started buying and reselling the e-minis, touching off a “hot potato” effect that impacted the rest of the stock market.  
  2. Fake “Free Insulin” Tweet, Nov 202210

    1. In a more recent example of the potential hazards of HFT, pharmaceutical company Eli Lilly lost billions of dollars in share price after a fake Tweet was sent out. The hoax made it seem like Eli Lilly is offering insulin for free – undoubtedly welcome news for diabetes patient in the U.S. who have to fork over more than USD$1,000 per month if they do not have insurance coverage. 
    2. This incident happened because of Elon Musk’s ill-thought-out tactic to sell verified Twitter accounts for USD$8 per month, opening the floodgates for a slew of imposter accounts to be set up. 
    3. However, while there is no concrete evidence that HFT caused the sell-off, it is not inconceivable that HFT strategies used by some traders on Eli Lilly stock might have sensed the coming decline and reacted accordingly, contributing to the over 4% loss in share value.  
    4. The point is while automated systems are capable of outsized performance, they are also prone to exaggerated outcomes when things invariably go wrong. And for a system such as HFT that moves faster than humans can react, this can be a keen double-edged sword. 

Conclusion: Balancing between efficiency and market safety  

At the end of the day, innovation and advancement is a fact of life. Those who do not keep up risk being left behind to deal with the negative consequences. That being said, we must be cognizant that not everything new and fancy is good, and we should not rush headlong to grab at whatever shiny new toys are dangled in front of us.  

Instead, it is essential to stride forward at a measured pace and only deal with the latest trends that have had ample chance to prove themselves.  

In your investing journey, consider partnering with a reputable brokerage that works to advance your interest in safe and proven ways.  

Vantage is a multi-award-winning online broker dedicated to creating the best investing and trading community. We offer industry-leading trading solutions and digital tools to bring you to the next level – whatever that may be for you.  

Join us to experience the Vantage difference today.  


  1. “High Frequency Trading: Evolution and the Future – CapGemini”. Accessed 11 Sept 2023.
  2. “High-frequency Trading Market Size, Current Insights and Demographic Trends 2023-2030 – MarketWatch”. Accessed 11 Sept 2023.
  3. “High Frequency Trading: Evolution and the Future – CapGemini”. Accessed 11 Sept 2023.
  4. “High-Frequency Trading: Overview and Examples – Investopedia”. Accessed 11 Sept 2023.
  5. “High-Frequency Trading: Overview and Examples – Investopedia”. Accessed 11 Sept 2023.
  6. “High Frequency Trading: Evolution and the Future – CapGemini”. Accessed 11 Sept 2023.
  7. “High Frequency Trading: Evolution and the Future – CapGemini”. Accessed 11 Sept 2023.
  8. “Will ChatGPT-powered Wall Street end in disaster? – Fortune”. Accessed 11 Sept 2023.
  9. “The 2010 ‘flash crash’: how it unfolded – The Guardian”. Accessed 11 Sept 2023.
  10. “Fake Eli Lilly Twitter Account Claims Insulin Is Free, Stock Falls 4.37% – Forbes”. Accessed 11 Sept 2023.