What is High Frequency Trading (HFT)?

High Frequency Trading (HFT) is the practice of intercepting a stock market trade and manipulating the share price to make a profit before an investor can react. Lewis uses the fictitious “Scalpers Inc.” to illustrate the phenomenon. Every time an investor wants to buy 1,000 shares from company X, Scalpers Inc. is immediately informed and buys 1,000 shares. Without taking the risk of owning the stock, Scalpers Inc. sells the 1,000 shares to the initially interested investor at a higher price. HFT preys on the slow speed of investors. If trades are conducted in multiple exchanges for a given stock, high-frequency traders pick up the faster signals and manipulate the slower ones. HFT is also the reason Wall Street companies scramble to find the latest equipment and fastest routes to stock exchanges. Value is measured in microseconds. A computer algorithm reacts, not a human. Even though HFT cheats investors, it is sanctioned by the law. Brokers are constrained by law to route their investor’s stock to the cheapest price. When price is the sole determinant of where a trade will happen, high-frequency traders know when to strike. HFT is also the primary reason characters like Brad Katsuyama and Ronan Ryan demanded a change of the marketplace. The stock exchange, IEX, is created not to eliminate the threat of HFT, but to diminish its power. HFT trades for the sole purpose of interfering with trading that would have happened without it. In essence, it is a tax on trade and upsets the free and fair marketplace.