HFT strategies utilize computers that make elaborate decisions to initiate orders based on information that is received electronically, before human traders are capable of processing the information they observe.
Algorithmic trading and HFT have resulted in a dramatic change of the market microstructure, particularly in the way liquidity is provided.
to send small slices of the order (child orders) out to the market over time.
They were developed so that traders do not need to constantly watch a stock and repeatedly send those slices out manually.
At about the same time portfolio insurance was designed to create a synthetic put option on a stock portfolio by dynamically trading stock index futures according to a computer model based on the Black–Scholes option pricing model.
Both strategies, often simply lumped together as "program trading", were blamed by many people (for example by the Brady report) for exacerbating or even starting the 1987 stock market crash.
Popular platforms for algorithmic trading include Meta Trader, Ninja Trader, IQBroker, and Quantopian.
Algorithmic trading is not an attempt to make a trading profit.
It is widely used by investment banks, pension funds, mutual funds, and hedge funds because these institutional traders need to execute large orders in markets that cannot support all of the size at once.
As a result of these events, the Dow Jones Industrial Average suffered its second largest intraday point swing ever to that date, though prices quickly recovered.
(See List of largest daily changes in the Dow Jones Industrial Average.) A July, 2011 report by the International Organization of Securities Commissions (IOSCO), an international body of securities regulators, concluded that while "algorithms and HFT technology have been used by market participants to manage their trading and risk, their usage was also clearly a contributing factor in the flash crash event of May 6, 2010." Computerization of the order flow in financial markets began in the early 1970s, with some landmarks being the introduction of the New York Stock Exchange's “designated order turnaround” system (DOT, and later Super DOT), which routed orders electronically to the proper trading post, which executed them manually.
For example, Chameleon (developed by BNP Paribas), Stealth), arbitrage, statistical arbitrage, trend following, and mean reversion.
This type of trading is what is driving the new demand for low latency proximity hosting and global exchange connectivity.
The term is also used to mean automated trading system. Also known as black box trading, these encompass trading strategies that are heavily reliant on complex mathematical formulas and high-speed computer programs.