Tags: High | Frequency | Trading

The Mixed Blessings of High Frequency Trading

By    |   Friday, 23 Dec 2011 07:19 AM

Several days before the “Flash Crash” of May 6, 2010, I exited the equities market, as described in my Moneynews article of May 6, 2010.

Exactly one year later, my article described how high frequency trading (HFT) actually increases volatility, despite the opposing rhetoric promulgated by the financial industry.

The reason:

HFT intentionally generates price movements away from the market equilibrium, forcing them to return back to that initial point.

This dynamic creates enormous price movements, or price volatility, which reduces liquidity. It also generates large trade volume, revenue, and profit.

The basic premise:

At any given time, someone is willing to pay a different price for a particular product than the market price. HFT permits the trader to locate that buyer, thereby creating a new price that does not reflect the broad market. Eventually, market forces return the price back to its initial setting.

This return process is typically aided by HFT, which exacerbates the move beyond the initial equilibrium, further increasing price volatility.

The European Securities and Markets Authority (ESMA) is concerned that the excess orders and messages created by HFT may cause systemic risk to the financial markets. As a result, they have embarked on a study to determine the effects on liquidity by HFT.

This dynamic has been clear for some time.

The reactive and myopic assessment of HFT by ESMA and the U.S. Commodity Futures Trading Commission (CFTC) is a microcosm of the global misappropriation of precious resources.

The resultant malinvestment precipitated a global financial cataclysm that will likely take decades to mend.

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Several days before the Flash Crash of May 6, 2010, I exited the equities market, as described in my Moneynews article of May 6, 2010. Exactly one year later, my article described how high frequency trading (HFT) actually increases volatility, despite the opposing...
High,Frequency,Trading
258
2011-19-23
Friday, 23 Dec 2011 07:19 AM
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