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High-Frequency Trading (HFT)

High-Frequency Trading (HFT) is a form of algorithmic trading that involves executing a large number of orders within fractions of a second. HFT utilizes high-frequency financial data and sophisticated electronic trading tools to analyze markets and execute a large volume of orders quickly.

High-frequency traders enter and exit trades at a rapid pace, aiming to capture small profits each time, which accumulate into significant amounts over time. Typically, algorithms with higher execution speeds have an advantage over slower ones.

HFT can improve market conditions by providing a constant influx of liquidity and potentially reducing high bid-ask spreads. Due to this positive impact on markets, some exchanges incentivize HFT by offering discounts or lowering fees for HFT providers.

On the other hand, high-frequency trading can significantly increase market volatility, as algorithms can make decisions within milliseconds without any human involvement. HFT is also a controversial trading method because the liquidity it provides can appear and disappear extremely quickly, preventing other traders from taking advantage of it.

Estimates suggest that HFT algorithms account for a significant portion of trading volume in global markets. Due to the complexity of these algorithms, access to this trading method is typically limited to large financial institutions.

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