Recent government investigations and a private lawsuit have turned a spotlight on the securities trading practice known as “high-frequency trading” or HFT. As a result, the practice has become one of the most talked about, yet least understood, subjects in the corporate legal industry.
Put simply, HFT involves the use of advanced computer systems that run algorithms to identify and execute trading opportunities in microseconds to milliseconds. Through this practice, traders are able to take advantage of price differences available on different electronic exchanges—or essentially, high-speed arbitrage. High-frequency traders often hold positions for very short periods, and they collect fractions of a penny on each share of large-quantity trades. HFT first gained the public’s attention after the May 2010 “flash crash,” which was traced back to problems with HFT software.
