Article Reviews, Trading

What High Frequency Trading (HFT) Is

I came across this superb 5-minute YouTube video that explains what is high frequency trading. I summarized the points made below. The presenter headed quantitative research at Tudor and UBS, and was a portfolio manager at Citadel, so he knows what he’s talking about. More information can be found on the presenter’s website here.


  • The goal is to obtain razor thin margins (a few cents or dollars per trade) on a massive number of trades per day.
  • Following the “Fundamental Law of Active Management”, a small forecasting edge on a large number of independent bets delivers a high Sharpe Ratio.


  • HFT strategies profit from imperfections in the microstructure of the double auction order book.
    • They are generally unrelated to valuation.
    • Microstructure imperfections arise due to rigidities (regulatory, psyche, IT), idiosyncracy, and asymmetric information.
    • Such imperfections would apply across a wide variety of products.


  • HFT strategies hold positions from a fraction of a second to a few hours.


  • Small amount of capital that is tactically deployed intraday.
  • Liquid markets to minimize transaction costs.
  • Accurate estimation of order flow toxicity (e.g. using VPIN Flow Toxicity metric)
  • Nuts and bolts
    • High performance software
    • Ultra-low latency lines
    • Fast processors
    • Co-location
    • DMA



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