Benjamin K_ Bailey#73

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How does high-frequency trading (HFT) influence forex markets?

High-frequency trading uses ultra-fast algorithms to execute thousands of orders per second, exploiting micro price discrepancies. In forex, HFT firms often trade on ECN (Electronic Communication Networks) or directly with liquidity providers. Institutions invest in co-location—placing servers next to exchanges—to minimize latency. Benefits: HFT adds liquidity, narrows spreads, and improves execution for all traders. Risks: flash crashes and predatory algorithms exploiting slower participants. For retail traders, HFT’s presence is invisible but impactful—spreads are tighter thanks to competition, but slippage can occur when algorithms pull liquidity instantly. Critics argue HFT creates systemic fragility, amplifying volatility during stress events. Example: the 2010 “flash crash” in equities had echoes in FX, showing how interconnected high-speed systems are. For long-term traders, HFT is not an enemy but a reality—understanding its influence means anticipating sudden spikes and respecting liquidity dynamics. Forex today is shaped not just by human traders but by machines racing at millisecond speed.