How do HFT Firms Work?

by Alessandro Ishak

While firms like Jane Street are often misunderstood as trying to predict markets or “beat” other investors, in reality, their core business is market making. They continuously offer to buy and sell financial products such as shares, ETFs, and options, earning small profits by buying slightly cheaper and selling slightly higher, millions of times a day. They do not need markets to rise or fall. They need prices to be accurate and trading to continue.

Their edge comes from understanding how related prices should move together and stepping in when they temporarily fall out of line. For example, rather than guessing where a stock index is headed, they may trade options that are mispriced relative to each other. This is about structure and consistency, not prediction.

Inside these firms, traders supervise automated systems and manage risk, researchers build mathematical models to price uncertainty, and engineers design fast, reliable infrastructure. Speed matters mainly for risk control, not aggression. Before anything trades live, it is tested extensively in simulations.

Overall, firms like Jane Street operate less like gamblers and more like applied science labs, focused on precision, discipline, and scale.

What do high frequency trading firms actually do?

High Frequency Trading (HFT) firms exist to provide liquidity to financial markets. Rather than waiting for others to trade, they continuously quote prices at which they are willing to buy and sell instruments such as shares, ETFs, and options. This role is known as market making. By always being present on both sides of the market, they make it easier and cheaper for other participants to trade.

To do this effectively, high frequency trading firms rely on automated systems that react to market changes in real time. These systems constantly adjust prices, manage inventory, and reduce exposure when conditions become uncertain. When done well, this process narrows bid-ask spreads and improves market efficiency, benefiting not just the firms themselves but also other investors who face lower trading costs.

How do they make money without predicting markets?

High frequency trading firms do not rely on forecasts about where markets will move next. Instead, they focus on pricing relationships that should hold at any moment in time. Many financial products are mathematically linked to one another, meaning that if one price moves, others should adjust consistently. When this does not happen, temporary mispricings appear.

Their profits do not come from predicting whether markets will go up or down. Instead, they earn very small amounts on each trade by buying slightly lower and selling slightly higher. On any single trade, the profit is almost negligible. The business works because these trades occur on an enormous scale, often millions of times per day, while risk is kept tightly controlled.

Firms like Jane Street build systems that monitor thousands of related instruments simultaneously and calculate what their prices should be relative to each other. When one instrument trades out of line, the firm can buy the underpriced one and sell the overpriced one, locking in a small, low-risk profit. This is not a bet on direction. It is a correction of inconsistency.

A well-known example is Jane Street’s activity in the Indian options market. The opportunity arose because options across different strikes and maturities were often priced inconsistently due to fragmented liquidity and heavy retail trading. By modelling the entire options surface as a whole, Jane Street was able to step in whenever prices diverged from where they should have been.

In essence, the firm profits from structure and discipline, not from predicting the future.

The Importance of Speed

Speed matters in high-frequency trading, but not in the way it is often portrayed. The main purpose of being fast is not to attack other traders, but to manage risk. When market conditions change, prices must be updated or withdrawn immediately. If a firm is slow, it can be forced to trade at outdated prices and suffer losses. Speed allows firms to keep their prices accurate and their exposure under control.

A common criticism is that fast firms face is front running. Front running refers to trading ahead of a known customer order. For example, if a trader knows that a large buy order is about to hit the market and buys first to push the price up, this disadvantages the original buyer by making their trade more expensive. This behaviour is illegal and closely monitored by regulators.

What often gets confused with front-running is reacting quickly to public information. Prices may update on one exchange slightly before another, and fast firms can respond to this information sooner. This does not rely on secret knowledge of orders, and it does not target individual investors. It is simply faster execution, not unfair access.