High-Frequency Trading (HFT)
HFT is when large numbers of stocks and shares are traded regularly (usually intra-day) in order to maximize the potential benefits of marginal changes in stock prices. HFT usually consists of at least 10,000 or more trades and can easily run into the millions, or even tens of millions, when considering large global banks.
Principle of HFT
In normal stock trades, the investor usually waits for at least a couple of months to decide whether the stock is heading in the right direction and then the investor will wait until the price drops or will sell the stock to reduce the impact of the loss. However each day, stock prices are fluctuating marginally at around 0.01 unless there is a significant change within the company. HFT utilizes these small changes to take into account the small day-to-day fluctuations and to hopefully profit out of the small changes.
If 1 share was bought for £1.00 and the day change was +0.01% then the profit made at the end of the day would be 0.01p.
If a bank buys 1,000,000 of the same shares then the profit made at the end of the day would be £10,000.
How this Relates to Banks
The price of a share may go up, or down, by around 0.4% which could give a profit of £400,000 a day if 1,000,000 shares were traded a day. Realistically, HFT is usually traded between currencies, on the Foreign Exchange, whereby the day changes are around 0.001p and the banks trade millions with each transaction each and every day. This is one of the many ways in which banks raise capital.