# How does high-frequency stock trading work (as in make money)? **URL:** \ **Category:** Factual Questions\ **Created:** [March 24, 2011, 4:05am UTC](https://boards.straightdope.com/t/how-does-high-frequency-stock-trading-work-as-in-make-money/575806 "2011-03-24T04:05:10Z")\ **Posts on this page:** 13\ **Page:** 2
**Author:** ![allotrope](https://avatars.discourse-cdn.com/v4/letter/a/edb3f5/32.png) [@allotrope](https://boards.straightdope.com/u/allotrope)\ **Post date:** [August 2, 2012, 4:08pm UTC](https://boards.straightdope.com/t/how-does-high-frequency-stock-trading-work-as-in-make-money/575806/21 "2012-08-02T16:08:54Z")
You’re all wrong. 99% of all HFT trades are canceled. THAT’s why it’s called high frequency trading. Now since you’re all so smart, why don’t you take a stab at why that might be. This should be amusing. ---
**Author:** ![Derleth](https://avatars.discourse-cdn.com/v4/letter/d/b9e5f3/32.png) [@Derleth](https://boards.straightdope.com/u/Derleth)\ **Post date:** [August 3, 2012, 5:41am UTC](https://boards.straightdope.com/t/how-does-high-frequency-stock-trading-work-as-in-make-money/575806/22 "2012-08-03T05:41:18Z")
> [@allotrope](#): > > 99% of all HFT trades are canceled. Who says? ---
**Author:** ![grude](https://avatars.discourse-cdn.com/v4/letter/g/e47774/32.png) [@grude](https://boards.straightdope.com/u/grude)\ **Post date:** [August 3, 2012, 5:54am UTC](https://boards.straightdope.com/t/how-does-high-frequency-stock-trading-work-as-in-make-money/575806/23 "2012-08-03T05:54:57Z")
How do these trades make financial sense? It seems there is an intrinsic cost in a trade with fees, so how does that not cancel out any profit when we’re talking about fractions of cents? ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [August 3, 2012, 6:09am UTC](https://boards.straightdope.com/t/how-does-high-frequency-stock-trading-work-as-in-make-money/575806/24 "2012-08-03T06:09:58Z")
> [@grude](#): > > How do these trades make financial sense? It seems there is an intrinsic cost in a trade with fees, so how does that not cancel out any profit when we’re talking about fractions of cents? What fees? Are you referring to the 0.0034% transaction tax currently imposed by the U.S. government? That works out to $1 for every $30,000 trade – almost insignificant (though good enough to add billions of dollars annually to U.S. Treasury coffers). Some Congressmen [want to impose a tax of 0.03%](http://www.huffingtonpost.com/2011/11/07/wall-street-transaction-tax-revenue_n_1080493.html). Anyone who claims such a tiny tax would have a severe adverse effect on small investors has been drinking the wrong Kool-Aid. > [@](#): > > A minuscule tax on financial transactions proposed by congressional Democrats would raise more than $350 billion over the next nine years, according to an analysis by the Joint Tax Committee, a nonpartisan congressional scorekeeping panel. > > The analysis was sent Monday to the offices of Sen. Tom Harkin (D-Iowa) and Rep. Peter DeFazio (D-Ore.), the lawmakers who proposed the tax, and provided to The Huffington Post. > > The Wall Street Trading and Speculators Tax Act would impose a tax of 0.03 percent on financial transactions, meaning that longterm investors would barely notice it, but traders who move rapidly in and out of positions would feel its sting and, the authors hope, reduce the volume of their speculation in response. Of course the tax would not apply to canceled orders. While it may be true that most HFT orders are not executed, it is illegal (but hard to prosecute) for a HFT order to make orders he intends to cancel quickly. ---
**Author:** ![allotrope](https://avatars.discourse-cdn.com/v4/letter/a/edb3f5/32.png) [@allotrope](https://boards.straightdope.com/u/allotrope)\ **Post date:** [August 3, 2012, 6:16am UTC](https://boards.straightdope.com/t/how-does-high-frequency-stock-trading-work-as-in-make-money/575806/25 "2012-08-03T06:16:28Z")
**Septimus** : :golf clap: ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [August 3, 2012, 6:21am UTC](https://boards.straightdope.com/t/how-does-high-frequency-stock-trading-work-as-in-make-money/575806/26 "2012-08-03T06:21:10Z")
> [@septimus](#): > > … it is illegal (but hard to prosecute) for a HFT order to make orders he intends to cancel quickly. Evidence has been presented that such orders have been used to manipulate prices. Since a typical small investor will lose only a few pennies on such a manipulation, these are often presented as “victimless crimes” but I disagree. I read that Wednesday’s trades will be unwound if the price differed by at least 30% from the opening. I’d be unhappy if I bought 29% too high. Those claiming these shenanigans do not affect small investors are, again, drinking Kool-Aid. ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [August 3, 2012, 6:33am UTC](https://boards.straightdope.com/t/how-does-high-frequency-stock-trading-work-as-in-make-money/575806/27 "2012-08-03T06:33:02Z")
> [@allotrope](#): > > **Septimus** : :golf clap: Do you have an intelligible contribution to make? :stifles a fart: ---
**Author:** ![allotrope](https://avatars.discourse-cdn.com/v4/letter/a/edb3f5/32.png) [@allotrope](https://boards.straightdope.com/u/allotrope)\ **Post date:** [August 3, 2012, 6:37am UTC](https://boards.straightdope.com/t/how-does-high-frequency-stock-trading-work-as-in-make-money/575806/28 "2012-08-03T06:37:18Z")
> [@septimus](#): > > Do you have an intelligible contribution to make? :stifles a fart: Nope, you’re doing fine - in sharp contrast to your predecessors I might add. ---
**Author:** ![grude](https://avatars.discourse-cdn.com/v4/letter/g/e47774/32.png) [@grude](https://boards.straightdope.com/u/grude)\ **Post date:** [August 3, 2012, 6:40am UTC](https://boards.straightdope.com/t/how-does-high-frequency-stock-trading-work-as-in-make-money/575806/29 "2012-08-03T06:40:56Z")
> [@septimus](#): > > What fees? Are you referring to the 0.0034% transaction tax currently imposed by the U.S. government? That works out to $1 for every $30,000 trade – almost insignificant (though good enough to add billions of dollars annually to U.S. Treasury coffers).. Aren’t there fees for even using the trading systems? Or do these big traders operate in a different arena? ---
**Author:** ![si\_blakely](https://avatars.discourse-cdn.com/v4/letter/s/d9b06d/32.png) [@si\_blakely](https://boards.straightdope.com/u/si_blakely)\ **Post date:** [August 3, 2012, 7:13am UTC](https://boards.straightdope.com/t/how-does-high-frequency-stock-trading-work-as-in-make-money/575806/30 "2012-08-03T07:13:55Z")
> [@grude](#): > > Aren’t there fees for even using the trading systems? Or do these big traders operate in a different arena? Yes, there are fees. While it may be propriety trading (thus no **brokerage** fees), the companies engaged in HFT are paying for access to the exchanges, and for the high speed links between systems (including massively expensive low-latency international fibre). They pay extra for the server racks in the optimal locations and preferential access to trading data systems. They also pay big money to the best maths and engineering graduates they can buy to write these systems. And (sometimes) they pay massive compensation when it all goes wrong (e.g Knight Capital). They make fractions per share, and go for volume (both number of shares and number of trades). And the battle is to be faster or to game the system - _Core Wars_ played out on the world financial markets. Risky business, indeed. Si ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [March 24, 2018, 8:14pm UTC](https://boards.straightdope.com/t/how-does-high-frequency-stock-trading-work-as-in-make-money/575806/31 "2018-03-24T20:14:35Z")
This thread already touches on reasons why HFT, however legal, is detrimental to financial markets and society. But HFT also offers opportunities for criminal frauds [like the frauds which Bank of America’s Merrill Lynch has been committing for several years](https://www.wsj.com/articles/bank-of-america-to-pay-42-million-to-settle-new-york-ag-probe-in-electronic-trading-1521820151). The $42 million they paid to settle part of the case is probably a pittance compared with the illicit profits they made. Amusing, one of the firms to which orders were fraudulently sent was the trading firm run by convicted Ponzi-scheme operator Bernard L. Madoff. ---
**Author:** ![Melbourne](https://avatars.discourse-cdn.com/v4/letter/m/b5e925/32.png) [@Melbourne](https://boards.straightdope.com/u/Melbourne)\ **Post date:** [March 25, 2018, 3:18am UTC](https://boards.straightdope.com/t/how-does-high-frequency-stock-trading-work-as-in-make-money/575806/32 "2018-03-25T03:18:45Z")
> [@septimus](#): > > This thread already touches on reasons why HFT, however legal, is detrimental to financial markets and society. > > But HFT also offers opportunities for criminal frauds [like the frauds which Bank of America’s Merrill Lynch has been committing for several years](https://www.wsj.com/articles/bank-of-america-to-pay-42-million-to-settle-new-york-ag-probe-in-electronic-trading-1521820151). The $42 million they paid to settle part of the case is probably a pittance compared with the illicit profits they made. Amusing, one of the firms to which orders were fraudulently sent was the trading firm run by convicted Ponzi-scheme operator Bernard L. Madoff. You will note that part of the fine was because BofA was _not_ using HFT, and was claiming to do so. Rather than analyzing at top speed what the market position was and where the best deal was, they were just settling trades with contracted companies. ---
**Author:** ![DesertDog](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/desertdog/32/11503_2.png) [@DesertDog](https://boards.straightdope.com/u/DesertDog)\ **Post date:** [March 26, 2018, 2:52pm UTC](https://boards.straightdope.com/t/how-does-high-frequency-stock-trading-work-as-in-make-money/575806/33 "2018-03-26T14:52:28Z")
> [@Chronos](#): > > The way it makes money is by being a broker and charging a commission from the people attempting it. Dopers were taking **Chronos** to task for this now seven-year old post, but I pretty much agree with it. Back in the day the practice was called churning and I see no reason to stop calling it that just because it’s been automated. A lot of folks denigrate the [large manufacturers](https://en.wikipedia.org/wiki/List_of_largest_manufacturing_companies_by_revenue), but at least they make their money by making something and selling it to customers who want it, and not by moving money around and scooping up what falls out of the basket. I’m lookin’ at _you_, [Goldman Sachs](https://en.wikipedia.org/wiki/Goldman_Sachs#Controversies_and_legal_issues). [Previous page](https://boards.straightdope.com/t/how-does-high-frequency-stock-trading-work-as-in-make-money/575806.md?page=1)