Magazine article Regulation

High-Frequency Stock Trading

Magazine article Regulation

High-Frequency Stock Trading

Article excerpt

"What Do We Know About High-Frequency Trading?" by Charles M. Jones. March 2013, SSRN #2236201.

High-frequency trading (HFT) uses automation to implement strategies that were previously performed by market specialists in exchanges. HFT has increased competition in market-making and reduced the price of capital. Bid-ask spreads have decreased over time and revenues to market-makers have decreased from 1.46 percent of traded face value in 1980 to 0.11 percent in 2006. And HFT reduces stock price volatility; when the temporary ban on short sales of financial stocks existed in 2008, the financial stocks with the biggest decline in HFT had the biggest increase in volatility.

Although most commentators recognize those benefits of lift, they also believe that it makes financial markets more fragile. The "Flash Crash" of May 6, 2010, during which futures for the S&P 500 fell almost 10 percent in 15 minutes, is often cited as an example of the costs created by HFT.

In this paper, Columbia Business School professor Charles Jones argues that HFT behavior during the "Flash Crash" was initially stabilizing, but eventually high-frequency traders also liquidated their positions, exacerbating the downturn. He claims that even before HFT, market specialists also behaved similarly, buying initially when others were selling and thus reducing the effects of a panic, but then eventually selling themselves. He concludes that HFT does not appear to be any more destabilizing than market specialists were. …

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