HFT utilizes super computers and algorithms to generate automatic trades. One major factor for high frequency trading is that information and actual stock trends are picked up by these super computers in real time and based on the algorithm, react accordingly.
An algorithm is a an order of sequential procedures for performing calculations. It is a step-by-step series of procedures used for calculation, data processing, and automated decision making or reasoning.
Distinguishing Characteristics of High Frequency Trading
Since trading behavior is based on the information coming in, the algorithm programmed into the system, and proprietary (built in) trading strategies, HFT is highly quantitative. The computer just reacts to the data and is highly objective.
Due to the dynamic movement of the market, stock and investment positions are considered temporary and can change in a manner of seconds. HFT systems may trade into a stock and trade out of it almost immediately.
In terms of a net investment position, HFT systems have none. High-frequency trading firms do not employ significant leverage, do not accumulate positions, and typically liquidate their entire portfolios on a daily basis.
