What is high-frequency trading?

Acoording to MIFID II (article 4, 40), high-frequency trading (HFT) or high-frequency algorithmic trading is "an algorithmic trading technique characterised by:

(a) infrastructure intended to minimise network and other types of latencies, including at least one of the following facilities for algorithmic order entry:

          - co-location,

          - proximity hosting, or

          - high-speed direct electronic access;

(b) system-determination of order initiation, generation, routing or execution without human intervention for individual trades or orders; and 

(c) high message intraday rates which constitute orders, quotes or cancellations".

Indeed, according to MIFID II, Algorithmic Trading (AT) comprises:

• High-Frequency Algorithmic Trading (HFAT);
• Other algorithmic trading - let's call it Low-Frequency Algorithmic Trading (LFAT).

It is claimed that HFT tends to benefit financial markets by leading to:

• Stronger market depth;
• Narrower bid-ask spreads;
• Smaller tick sizes.

But is is also claimed that HFT introduced new risks to financial markets:

• Complex forms of market manipulation (such as spoofing and quote stuffing);
• Disorderly trading (abrupt market moves with no fundamental reason, aka Flash Crashes);
• Large unbalance in trading skills between professional trading houses and small investors.