What it is:
Ultrafast trading, also called high-frequency trading, is a method of trading with software that places trades in fractions of a second.
How it works (Example):
Ultrafast trading relies on software and algorithms that react to other trades in thenearly instantaneously. Brokerage firms and other financial institutions use this software, which is usually proprietary and built in-house.
Why it Matters:
Ultrafast trading allows firms to capitalize on tiny price changes by allowing them to buy and sell within seconds. However, many critics argue that this activity makes markets more volatile and that it may cause "flash crashes" and other big swings. Regulators in different countries place differing levels of restrictions on ultrafast trading, such as minimum time differences between buy and sell orders.