HIGH FREQUENCY TRADING:
High Frequency Trading or HFT for short is not any one thing. The term covers a wide range of trading activities. What most of them have in common is that they are computer driven algorithms resulting in rapid turnover of whatever is being traded in an effort to generate a tiny profit on each round trip.
A huge amount of money is being spent on infrastructure to accommodate this type of trading. Examples are nationwide underground fiber optic networks which carry data and orders at amazing speeds. This kind of infrastructure is able to be built and sold at a profit because the difference of nanoseconds can be worth many millions of dollars to the firms engaging in HFT.
There are two major viewpoints on HFT. The common belief held by most non HFT traders is that the HFT firms front run their orders and slice off a fraction of a cent on each trade. The HFT firms maintain that they add liquidity and actually make the spreads smaller and the market place safer.
A large part of the reason that HFT can exist is the fragmentation of the markets which enables arbitrage for fractions of a cent in less than a second. One of the major problems with HFT is that the HFT firms have negotiated with the various exchanges to provide for them specific order types which give them an unfair advantage. There have been many complaints that these order types are not documented and therefore effectively not available to anyone but the HFT firms. Many of the order types are geared to allow the HFT firm to jump the queue and place their order ahead of other orders that were there before them. Others are designed to allow the HFT firm to minimize losses at the expense of another order that should have been executed first. In other words, they get to cover their order before other orders that were waiting. In addition, the HFT firms are accused of violating the maker-taker model by capturing the liquidity rebate that should rightfully go to another trader.
All of these viewpoints are open to debate and the strategies and order types are constantly being further developed so are difficult for regulators to get a handle on.