Key Takeaways
- 70%+ of market volume comes from high-frequency trading algorithms
- Market makers profit from you — they're designed to take the other side
- Your broker might sell your order flow to HFT firms before executing
- Retail traders are the "dumb money" that pros actively hunt
- Understanding your counterparty changes how you should trade
The Invisible Crowd Behind Every Trade
You've just finished your research. Studied the charts. Read the news. You're confident — this stock is going up.
You open your trading app, type in the ticker, and hit "BUY."
In that fraction of a second, something magical happens. Somewhere in the world, someone — or something — hits "SELL." Your orders match. The trade executes. You own shares.
But wait. Who just sold to you?
"Every trade has a winner and a loser. If you don't know which one you are, you're probably the loser."
— Wall Street Proverb
This isn't a philosophical question. The identity of your counterparty reveals the game you're actually playing — and whether the deck is stacked against you.
Let's pull back the curtain.
The Cast of Characters: Who's in the Trading Arena
Imagine the stock market as a giant colosseum. Every day, millions of participants enter the arena, each with different motivations, resources, and strategies.
Here's who you might be trading against:
HFT Algorithms
High-frequency trading bots
Execute in microseconds
Market Makers
Citadel, Virtu, Jane Street
Always provide liquidity
Institutions
Hedge funds, mutual funds, pensions
Trade millions at once
Retail Traders
Other people like you
Smallest piece of the pie
Now here's the disturbing truth: 70% or more of all stock market volume comes from high-frequency trading algorithms.
That means most of the time, when you buy a stock, you're not trading against another human. You're trading against a machine that processes information millions of times faster than you can blink.
The Market Makers: Your Friendly Neighborhood Predator
Market makers have a beautiful job description: "provide liquidity to markets."
Translation? They're always willing to buy what you're selling and sell what you're buying. Sounds helpful, right?
Here's how they actually make money:
The Spread: Their Built-In Edge
Market makers simultaneously offer to buy at one price (bid) and sell at a higher price (ask). That difference — the spread — is their guaranteed profit on every round-trip trade. You pay it every single time.
But spreads are tight now — often just $0.01. So how do market makers like Citadel Securities make billions?
Volume. Pure, staggering volume. When you're handling 40% of all U.S. retail stock trades, even a penny adds up to mountains of gold.
"Citadel Securities handles more trading volume than the New York Stock Exchange. One private company. Think about that."
— Market Structure Analyst
Payment for Order Flow: Your Broker Sold You Out
Here's a question: If your broker offers "free" trades, how do they make money?
They sell your orders.
It's called "Payment for Order Flow" (PFOF), and it's one of the most controversial practices on Wall Street.
Why would Citadel pay for your order? Because retail orders are incredibly valuable.
Retail traders are considered "uninformed flow." Unlike hedge funds, you probably don't have insider information. You're not front-running earnings. You're just... trading.
That makes you predictable. And profitable to trade against.
They See Your Order
Before it reaches the exchange, the market maker knows exactly what you want to buy or sell.
They Calculate the Edge
Algorithms determine if they can profit by taking the other side of your trade.
They Act First
In microseconds, they can adjust prices or position themselves advantageously.
They Fill Your Order
Often at a slightly worse price than you could have gotten otherwise.
Is this illegal? No. Is it fair? That's... debatable.
"If you're not paying for the product, you are the product. In 'free' trading, your order flow is the product being sold."
— SEC Commissioner
The Hedge Fund Hunters
Not every trade flows to market makers. Sometimes, you're actually trading against another human — just one with a lot more firepower.
Hedge funds employ armies of PhDs, access to satellite imagery, alternative data, and algorithmic systems that would make NASA jealous.
And many of them specifically hunt retail traders.
David vs. Goliath (But Goliath Has Drones)
When you trade based on news, hedge funds already knew — sometimes weeks ago. They have real-time data on credit card transactions, satellite images of parking lots, and algorithms that read every SEC filing in milliseconds.
Some hedge funds specifically analyze retail order flow to predict what stocks are about to be pumped on social media. They position themselves before the crowd, then sell into the buying frenzy.
You think you found a great trade? They might have engineered the narrative that made you find it.
The High-Frequency Machines
Now we get to the real apex predators: High-Frequency Trading (HFT) firms.
These are companies that spent $300 million to lay a slightly straighter fiber optic cable between Chicago and New York. Why? To shave 3 milliseconds off their execution time.
Let that sink in. $300 million for 0.003 seconds.
The Speed Arms Race
HFT firms now co-locate servers inside exchange data centers. Their cables are measured in nanoseconds. By the time your order travels from your phone to the exchange, they've already analyzed, positioned, and traded — thousands of times.
HFT firms use strategies like:
Latency Arbitrage
Seeing your order on one exchange and racing to buy on another before your order executes.
Quote Stuffing
Flooding exchanges with fake orders to slow down competitors' systems.
Momentum Ignition
Creating fake momentum to trigger other algorithms, then trading against them.
Statistical Arbitrage
Finding micro-patterns humans can't see and exploiting them millions of times.
"You're not trading against other humans anymore. You're a goldfish swimming in a tank with sharks that can see in ultraviolet."
— Former HFT Developer
The Rare Cases: When You Trade Against "Normal" People
Despite everything above, sometimes — just sometimes — you actually do trade against another regular person.
This typically happens in:
IPO Allocations
Institutions selling to retail on day one
Insider Sales
Executives selling shares after lockup
Fund Rebalancing
Index funds mechanically buying/selling
Retail Mania
Meme stock frenzies: retail vs retail
During the GameStop saga of 2021, retail traders were genuinely trading against each other — and against hedge funds like Melvin Capital that got crushed.
Those moments are rare. Cherish them. Or fear them — because when the crowd is all on one side, the only question is who's trapped.
The Dark Pools: Where Whales Hide
Think all trading happens on the NYSE or NASDAQ? Think again.
Over 40% of U.S. stock trading happens in "dark pools" — private exchanges where orders are hidden from public view.
Why do they exist? Supposedly, to let big institutions trade without moving the market. If BlackRock wants to sell 10 million shares, putting that order on a public exchange would crash the price before they could execute.
But here's the catch: retail orders go there too.
The Two-Tier Market
When your order goes to a dark pool, you have no idea who you're trading with or whether you got the best price. The counterparty could be anyone — including the same HFT firm that paid for your order flow.
The irony? Dark pools were created to protect large orders from predatory traders. Now they're often run by the same firms that trade against retail investors.
How to Trade Knowing Who's on the Other Side
Now that you know who you're up against, here's how to adapt:
Extend Your Time Horizon
HFTs win in milliseconds. Hedge funds win in days. Retail can win in months and years where short-term noise matters less.
Use Limit Orders Always
Market orders let someone else choose your price. Limit orders put you in control — even if it means waiting.
Avoid Obvious Patterns
If you're buying because of a viral tweet, assume everyone else is too — including the predators selling to you.
Trade Liquid Stocks
In illiquid stocks, the spread destroys you and the counterparty has more control. Stick to high-volume names.
Think in Terms of Edge
Ask: "What do I know that the algorithms don't?" If the answer is nothing, reconsider the trade.
Consider IEX Exchange
Some brokers let you route orders to IEX, which uses a "speed bump" to neutralize HFT advantages.
The Game Behind the Game
Every time you trade, you're entering an arena where the other participants have spent billions of dollars to gain an edge over you.
That's not a reason to give up. It's a reason to understand the game.
The market makers and HFT firms are optimized for speed and volume. They dominate microseconds. But they're not competing in months or years.
The hedge funds have infinite resources. But they're under pressure to perform quarterly. They can't always wait for the best opportunities.
As a retail trader, your edge is patience. Flexibility. The ability to do nothing when there's nothing good to do.
"The stock market is a device for transferring money from the impatient to the patient."
— Warren Buffett
The next time you click "Buy," remember: someone is clicking "Sell" at the exact same moment. They might be a machine. They might be a hedge fund. They might have information you don't. But they also might be wrong — and over the long run, fundamental value wins. Trade with that knowledge, not against it.