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High Frequency Trading: How Algorithms Trade in Microseconds

Beginner Investing • 6 min

What this lesson is about

Some firms spend millions building faster fiber cables just to shave microseconds off a trade. Here's why speed itself became the whole business.

2 parts · a quick check after each · then the quiz

Part 1 of 2

In 2010, a firm spent hundreds of millions building a straighter fiber-optic cable between Chicago and New York. They did this to cut about 3 milliseconds off the time it took data to travel between the two cities. Three milliseconds is faster than a human eye can blink. That’s how seriously high-frequency trading (HFT) firms take speed.

HFT uses computer algorithms to place, adjust, and cancel huge numbers of orders in fractions of a second. They often hold a position for just seconds or even less. These firms usually act as market makers, constantly quoting both buy and sell prices. They profit from the tiny spread between them, thousands of times a day.

The order bookResting orders on both sides. Big orders eat through them.

Quick check

What is high-frequency trading (HFT), broadly?

Part 2 of 2

Insider Angle: The whole business model relies on being microseconds faster than everyone else. Being the first to see a price change and react can mean real money, repeated millions of times a day. Critics say this speed advantage allows some HFT firms to detect large incoming orders from slower investors and trade ahead. This is a modern version of front-running. Regulators have investigated it repeatedly, but they haven’t fully resolved how much of it actually happens.
Try This: Check a stock's real bid-ask spread right now in a public options chain. That tight spread is mostly a result of market-making activity, much of it algorithmic. Think about what that spread might look like without constant algorithmic quoting.

Quick check

Why do some HFT firms spend enormous sums on things like microwave towers or ultra-short fiber routes between exchanges?

Try This - Live Data

A real current quote snapshot for SPY, one of the most heavily HFT-traded tickers.

Loading live data…
Quiz

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