High frequency trading
High speed computer trades
High frequency trading uses computers, rather than people, to
generate buy and sell orders on markets such as Chi-X and the
Australian Securities Exchange (ASX). There are concerns that this
type of trading may lead to disorderly markets and market
Here we explain high frequency trading, the benefits and some of
the risks involved.
What is high frequency
High frequency trading (also known as HFT and 'robot trading')
is a type of trading that uses very fast computer programs to enter
orders and execute trades on a market. These trades can be executed
a lot quicker than trades made by humans.
Because the buy and sell orders can be generated so quickly,
multiple trades can also occur at great speed. Profits or losses
are made on the difference in the buy and sell price.
High frequency trading can add liquidity to markets which may in
turn assist market pricing by ensuring the gap between 'the bid'
(the highest price a buyer is willing to pay) and 'the ask' (the
purchase offer) is not too wide.
It can also help ensure consistent pricing across different
markets which trade the same products or stocks.
Market disorder can happen when, with no human intervention, an
'aberrant algorithm' in the computer program enters orders and
trades (sometimes in vast numbers) by mistake.
If the algorithm malfunctions and quickly places many orders and
trades (sometimes with itself), this can have a severe impact on
the market and can lead to 'disorderly trading'.
Some investors, including those that trade in large volumes, are
concerned that high frequency trading may be interfering with
trades made by both institutional and retail investors.
High frequency trading is legal as long as it complies with
relevant ASIC market integrity rules and the Corporations Act.
ASIC is planning to create new rules on automated trading,
including the requirement for systems to have a 'kill-switch',
which will immediately turn off a faulty algorithm and reduce
volatility. Additional controls will also be compulsory to prevent
trades from occurring where unusual extreme volatility occurs. For
more information, see ASIC's media release about new market
Like any trading, high frequency trading has
benefits as well as risks. This type of trading is part of our
markets and you need to be aware of this when you are trading
Last updated: 18 Aug 2015