Studio Aletheia Logo
Trading Lab 101 · Lesson 6
High-Frequency Trading (HFT) – Speed, Latency & Microstructure
Examine how ultra-fast trading firms use co-located servers and microsecond decision-making to exploit tiny, short-lived price differences across exchanges.
Lesson Overview +
Lesson 6 zooms down to the microsecond layer of the market. Instead of thinking in minutes or even seconds, learners explore how high-frequency traders battle over tiny price gaps that exist for fractions of a second.

Students see why co-location, fiber routes, and low-latency infrastructure matter, what “latency arbitrage” looks like in a simple Exchange A / Exchange B example, and why humans cannot manually compete. The focus is on understanding the market’s microstructure and the trade-offs of a system where speed becomes its own kind of edge.
Lesson Video · High-Frequency Trading (HFT)
Full Lesson Text

Informational Text – What Is High-Frequency Trading?

High-Frequency Trading (HFT) is the fastest form of algorithmic trading, operating at speeds far beyond human capability. HFT firms use co-located servers—computers placed directly inside exchange data centers—to reduce latency to microseconds.

HFT strategies look for tiny price inefficiencies that may exist for only a fraction of a second. For example, an HFT system might see a stock priced at $50.10 on one exchange and $50.13 on another, quickly buying at the lower price and selling at the higher one before prices realign. This is a form of latency arbitrage.

Because these opportunities disappear almost instantly, HFT firms spend huge amounts of money on infrastructure: co-location fees, ultra-fast network connections, and custom hardware. They also rely on advanced programming and detailed knowledge of market microstructure—the millisecond-level rules governing how orders are matched, routed, and filled.

For most individual traders, this world is inaccessible. The cost of the technology is high, and human reaction time is simply too slow to compete in this space. Instead, most retail traders operate on longer timeframes where HFT’s speed advantage matters less.

Scenario Example – Arbitrage Between Two Exchanges

Imagine a stock trading on two different exchanges at the same time. On Exchange A, the stock is quoted at $100.00. On Exchange B, it is quoted at $100.02.

An HFT algorithm detects this price difference in microseconds. It instantly buys shares on Exchange A at $100.00 and sells the same number of shares on Exchange B at $100.02. The algorithm captures a 2-cent profit per share before most traders even see the quotes on their screen.

A human trader might notice the price difference a second or two later, but by then, the opportunity is gone. The prices have already aligned—often because the HFT systems themselves just traded away the gap.

Process Summary – How HFT Strategies Operate

  • Use co-located servers to reduce the physical distance between trading computers and exchange servers.
  • Monitor multiple exchanges at once, constantly scanning for tiny price mismatches.
  • Detect price differences using ultra-fast algorithms tuned to microsecond-level data.
  • Enter and exit positions in microseconds, often flattening before humans can react.
  • Capture tiny gains repeatedly, aiming for consistency through volume rather than large profits per trade.

Key Vocabulary

  • Colocation – Placing trading computers inside or next to exchange servers to reduce delay.
  • Latency Arbitrage – Profiting from price differences between exchanges caused by tiny timing delays in how quotes update.
  • Order Routing – The process that decides which exchange or venue receives a trading order.
  • Microstructure – The ultra-fine details of how a market operates at the millisecond level, including matching rules, queues, and routing.

Cross-Strategy Vocabulary Use:

  • Latency → algorithmic trading, HFT systems, network design
  • Order Routing → scalping, broker platforms, complex algo systems

Lesson Flow – How the Session Unfolds

Learning Target: I can explain how HFT exploits microsecond-level inefficiencies.

Essential Question: Why do high-frequency traders require specialized technology?

Bell Ringer: Students predict what happens if two exchanges show different prices for the same stock at the same time. Who gets the better price, and how long can the difference last?

Mini-Lesson: The instructor introduces co-location, speed-based trading, and the idea that inefficiencies disappear almost instantly. Students see simplified visuals of servers inside an exchange and quotes updating across multiple venues.

Modeling: The Exchange A / Exchange B arbitrage scenario is walked through step by step. Students see where the HFT algorithm buys and sells, and why a delay of even a few milliseconds would erase the profit.

Guided Practice: Students analyze a small sample dataset that shows price updates from two exchanges. They identify moments where an HFT could capture latency arbitrage and where the opportunity is gone.

Independent Practice: Students write a 4–5 sentence explanation of why humans cannot perform HFT, using vocabulary like latency, co-location, and microstructure.

Closure: Students decide whether HFT is “more similar” to scalping or to broader algorithmic trading and defend their answer in one or two sentences.

Exit Ticket: What is latency arbitrage?

Studio Aletheia Logo
Trading Lab 101 · Lesson 6 Activity
Latency Lab – HFT vs Human Reaction
Use a simple two-exchange scenario to map out where an HFT system can act, where a human cannot, and what infrastructure is required to make speed itself a trading edge.

Imagine you are designing a tiny “HFT lab” to study how speed changes trading. In the panels below, you will describe a price snapshot across exchanges, identify a latency arbitrage opportunity, explain why humans cannot compete at this layer, outline the technology stack required, and reflect on fairness and impact. When finished, generate a summary, optionally print/save a copy, and submit your work to your instructor.

1. Market Snapshot & Price Differences +
2. HFT Opportunity – Latency Arbitrage +
3. Human Reaction vs HFT Speed +
4. Tech Stack & Infrastructure for HFT +
5. Fairness & Market Impact +
6. Summary – Why HFT Requires Specialized Technology +
Generated Summary (copy, print, or save):
Mastery Check
Fill in all six sections with thoughtful responses. When everything is complete, this badge will glow to indicate that you understand how HFT, latency, and infrastructure work together at the microsecond level.