High Frequency Trading (also known as HFT) is a fairly recent
phenomenon that has been born from the use of sophisticated Algo
and Black Box trading systems by major financial institutions
around the world.
HFT is where computers make trading decisions to place orders
before human traders are capable of entering orders into the market
place. This has resulted in changes to the way that liquidity is
provided in the market and has at times been the cause of major
market fluctuations resulting in millions of pounds being won or
lost in a matter of minutes.
In 2006 it was estimated that around 30% of all stock trades
entered into the European market were entered by algorithmic high
frequency trading houses. That figures has now grown to nearly 70%
and is likely to continue to grow in the next few years. Other
types of trading are also seeing growth in algo HFT trading with
both the foreign exchange and futures and options market places
witnessing an increase in the number of computer generated
orders.
As previously mentioned HFT has resulted in some markets
suffering from extreme volatility with the best example of this
being the Flash Crash in 2010 when the Dow Jones Industrial Average
plunged 900 points in a matter of minutes only to recover those
losses in a similar amount of time resulting in a daily trading
range of over 1000 points.