High-Frequency Trading: What is HFT and why does it dominate the markets?

Fundamental Definition and Concept of HFT

The term “HFT” is the English acronym for “High-Frequency Trading,” which in Spanish is known as High-Frequency Trading. It is an algorithmic investment strategy characterized by executing thousands of transactions in just milliseconds, using sophisticated computer systems capable of processing information from multiple markets simultaneously. Unlike traditional trading, this type of operation operates completely automatically, without human intervention in each decision.

The Massive Presence of HFT in Global Markets

The figures are telling: in the United States, HFT accounts for between 50% and 60% of the total volume traded in equity markets. This figure reflects the deep penetration this strategy has achieved in major financial centers. It is not an exclusively American phenomenon; markets like London, Frankfurt, and Tokyo also report a significant presence of high-frequency traders using these algorithms to capture gains in nearly imperceptible time windows.

The Main Actors of HFT

Behind these operations are specialized companies such as Virtu Financial and Citadel Securities, which have invested massive resources in technological infrastructure and human talent. These organizations have teams of engineers, mathematicians, and quantitative analysts who constantly design and refine their algorithms to maintain competitive advantages in microseconds. Their ability to process data and execute operations at extremely high speeds allows them to identify and capitalize on price discrepancies that the human eye could never detect.

Positive Impact: Market Liquidity and Efficiency

One of HFT’s greatest contributions has been the dramatic improvement in market liquidity. By constantly maintaining supply and demand available, HFT ensures that there are always counterparties for transactions, significantly reducing transaction costs. Bid-ask spreads have been considerably compressed thanks to this high-speed competition. Additionally, HFT acts as a price arbiter, identifying and correcting inefficiencies between trading platforms, resulting in more consistent and reliable price setting.

The Technological and Ethical Challenges It Presents

However, this phenomenon has also raised legitimate concerns. The extreme speed of HFT can exacerbate volatility during periods of market stress, as evidenced in some “flash crashes.” There is concern about whether certain algorithms might be used to manipulate markets, creating patterns that benefit their operators at the expense of smaller investors. Retail investors face an uneven playing field due to their limited technological resources and necessarily slower reaction times.

Technological Evolution Driven by HFT

The rise of High-Frequency Trading has catalyzed extraordinary advances in technological infrastructure. Network connection speeds have been optimized to the maximum, servers process information at previously unimaginable scales, and algorithmic trading software has reached levels of sophistication rivaling artificial intelligence. These advances transcend HFT and positively impact the entire financial services industry.

The Constantly Evolving Regulatory Framework

Global regulators have become aware of the need to oversee these practices. MiFID II Directive in Europe, for example, imposed strict requirements on algorithms, demanding transparency and control mechanisms to prevent market abuse. Other regulatory bodies continue designing frameworks aimed at balancing technological innovation with market and participant protection.

Practical Application in Major Financial Centers

In reality, HFT is concentrated in major financial centers where the most advanced infrastructure operates. The world’s leading stock exchanges and electronic trading platforms have adapted their systems to accommodate these extreme speeds, competing to offer lower latencies and higher execution speeds. Only institutions with significant capital and access to cutting-edge technology can effectively participate in this segment.

Future Perspectives of High-Frequency Trading

As technology continues to advance, HFT is likely to evolve further, potentially integrating more sophisticated machine learning and artificial intelligence. Regulators will face the ongoing challenge of keeping markets fair and orderly while allowing innovation. For market participants, understanding how HFT works and its implications has become imperative to navigate modern markets efficiently.