How Do High-Frequency Trading (HFT) Firms Profit from Exploiting Small Bid-Ask Spreads?

High-frequency trading (HFT) firms profit from exploiting small bid-ask spreads by executing a massive number of trades at incredibly high speeds. Their algorithms are designed to identify tiny, fleeting discrepancies in the bid-ask spread and to place orders to capture the difference.

This strategy, known as 'arbitrage,' is repeated thousands or even millions of times a day, with each trade generating a very small profit. The cumulative effect of these small profits can be substantial.

HFT firms rely on their technological advantage, including co-located servers and sophisticated algorithms, to be faster than other market participants.