High-Frequency Trading Explained

What is high-frequency trading? It is a style of automated trading in which positions are held for seconds or less and decisions are made in microseconds. It accounts for a large share of trading on major electronic exchanges, and it is widely discussed and often misunderstood.

What is high-frequency trading, exactly?

There is no legal definition everyone agrees on. In practice, HFT firms trade their own money, hold positions very briefly, end most days with little or no inventory, and compete on the speed and cost of their systems. Most of their trading is market making: standing ready to buy and sell, and earning the difference.

Is high-frequency trading good or bad for markets?

The research is mixed. Many studies find that electronic market making narrowed spreads for ordinary investors. Others point to liquidity that disappears in stress, as during the flash crash of May 6, 2010, and to speed races that cost more than they return. This course sets out the main arguments and the evidence behind them.

Where does this course lead?

It is the free starting point of the high-frequency trading track. Order Books, Execution Algorithms and Trading Costs is the next step, then the researcher-level High-Frequency Trading and Market Making.

What you will be able to do

• Explain how HFT's defining characteristics—speed, turnover, and high order-to-trade ratios—distinguish it from conventional investment approaches.
• Calculate how a market maker's gross revenue scales from fractional cents per share to eight-figure daily earnings through volume and repetition.
• Distinguish latency arbitrage, statistical arbitrage, and index arbitrage by their time horizons, certainty profiles, and the specific market imperfections each exploits.
• Identify the six discrete stages of execution latency and explain why consistency of timing is as operationally significant as average speed.
• Evaluate the empirical case for and against HFT's effects on liquidity, distinguishing between normal-day spread compression and stress-period fragility.
• Reconstruct the sequence of events in the May 2010 Flash Crash and assess which post-crash regulatory reforms addressed structural causes versus observable symptoms.

Syllabus, module by module

1. What Is High-Frequency Trading?

   Traces the evolution of financial exchanges from open-outcry trading pits to electronic markets, and defines high-frequency trading by its speed, turnover, and order-to-trade characteristics.

2. How HFT Firms Make Money: Market Making

   Explains how HFT firms earn revenue through continuous market-making, using bid-ask spreads multiplied across millions of daily transactions.

3. How HFT Firms Make Money: Arbitrage

   Covers the three primary arbitrage strategies—latency, statistical, and index—that HFT firms use to profit from structural price gaps across fragmented markets.

4. Why Speed Is Everything: The Race to Zero Latency

   Examines how total execution latency is built from six discrete pipeline stages and how infrastructure investments drive the arms race toward zero latency.

5. The Debate: What Does the Evidence Actually Say?

   Reviews the empirical research on HFT's effects, covering the 2010 Flash Crash, phantom liquidity, spread compression, and the conditional nature of HFT's liquidity provision.

6. Market Chaos and the Rules That Followed

   Reconstructs the mechanics of the May 2010 Flash Crash and evaluates the regulatory reforms that followed, distinguishing what was fixed from what remained structurally fragile.

What every course contains

Every paid course comes with the first seven and the certificate, whichever level it sits at. The proctored exam and the credential come when the course is taken as part of a Certificate, Diploma or Fellowship. Everything is self-paced: the material is yours to study in any order, at any hour, for the whole of the license.

1. Workbooks. Written to train the thinking patterns and the important concepts of the course, with worked problems and the reasoning behind each answer, so that you learn to think the way the subject is thought.
2. Audio edition. Focused, well-presented recordings with explainers and examples of the material, made to be interesting, relevant and entertaining, so that the general subject can be learned away from the desk.
3. Notes. Pre-produced notes with every fact the course relies on, written out in full, so that nothing has to be transcribed from the films or the audio.
4. Cheat sheet. One sheet with every important learning concept of the course on it, to keep beside you during the work and to revise from before the exam.
5. Named sources. Every fact in the notes names its source, the paper, the book or the dataset, for anyone who wants to dig in further.
6. Explainer films. Focused films, in the style of the sample films on the catalog page, that walk through the most difficult concepts of the course with visual explanations of a high standard.
7. Transcript. A full transcript of every film and every audio recording, searchable and quotable.
8. Proctored exam. Taken as part of a Certificate, Diploma or Fellowship, the course ends in a proctored multiple-choice questionnaire, with a pass mark of 60% and three retakes included. A course taken on its own is assessed by its coursework and has no exam.
9. Verifiable certificate. A certificate of completion that a third party can verify: an employer sends the code on it to the credentials office and receives written confirmation of the course, the date and the result.
10. Credential of the program. The Certificate, Diploma or Fellowship of the program, track or path the course belongs to, awarded when every course in it is passed. Which one depends on the program you choose.

Assessment

Not assessed. Study notes, a cheat sheet and a workbook come with every lesson. Open courses are free, have no exam and award no certificate. Read how certification works.