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Investing Insights - What is High Frequency Trading?

Updated: Sep 4, 2022

High Frequency Trading or HFT is becoming responsible for greater than 70% of all trading on major exchanges. HFT uses sophisticated computer programs and specialized computers along with direct access to exchanges to trade equities, futures, exchange traded funds (ETFs), and currencies with the goal of trading in microseconds (one millionth of a second). In some cases HFT who are “flash trading” are allowed to see orders for a millisecond ahead of retail participants, in essence front-running.

Some savvy hedge fund managers have labelled HFT the “newest financial weapons of mass destruction” in reference to the “flash crash” experienced in May of 2010. While proponents of HFT including some of the Canadian Banks believe they added liquidity and depth to the market, we have observed the opposite as their orders get pulled in times of market duress.

HFT in many cases has accelerated market moves and volatility (in both directions). The end result has been the continued abandonment by investors who trade securities based upon value and replaced with machines that make decisions based upon price-momentum-based algorithms.

To minimize the effects of high frequency trading, we at Northland Wealth Management believe that a well- structured portfolio (of dividend generating companies, fixed income and alternative investments) tailored to your own unique needs and objectives will provide the best return vs. risk in order for you to obtain your financial goals and objectives.


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