The financial markets play an important role in the financing of the real economies of the different countries of the world. It is important to note that the financial markets channel the savings as well as the investments. They also play an important role in the facilitation of the formation of the capital as well as ensuring the efficiency of the transfer and the allocation of the risks. The financial markets should be transparent, efficient, orderly and fair to allow the investors to be able to rapidly and easily determine the markets best available prices. It should also be noted that there should be fairness in the access to the markets. Moreover, liquid and deep markets usually play the role of the creation of opportunities for the different companies that are listed in the financial market to be able to raise funds (Avramovic, 2010). The markets also provide the participants with the opportunity to be able to engage in the investment and the management of the risks. The search costs, transaction costs and asymmetries in the information are greatly reduced in the financial markets that are efficient as the presence of the above in the financial market will lead to participant's reluctance and the loss of confidence in the financial market.
There is always a great fear whenever there is a lack of information that is created in the market especially when the other party who is involved in the trading has massive or superior information or is focused on manipulating the financial market. It is important to note that in the last few decades, the financial markets have adopted great levels of automation especially in the trading of the securities. In the past, many financial markets adopted the electronic order book as the main market model for their functionality while significantly abandoning the floor trading that is human intermediated.
[...] Impacts of HFT of financial markets It is important to note from the outset that due to the recent nature of the development on the area of HFT, there is a significant scarcity of the data on the concept due to the limitations in the availability of the datasets that are appropriate as well as the theoretical and empirical difficulties that are raised by the concept (Brogaard, 2012). The impacts will be discussed under number of sub-headings. Effects on the liquidity The liquidity is a very important measure or indicator of the quality of the financial market. [...]
[...] It is important to note that in the last few decades, the financial markets have adopted great levels of automation especially in the trading of the securities. In the past, many financial markets adopted the electronic order book as the main market model for their functionality while significantly abandoning the floor trading that is human intermediated. The above changes have been brought about by the advances in the communication technology, the computing power and the improvements in the capabilities of programming have all played a part as they can be used in the development of new tools that can be used in the decision making in the investment, execution of trade, as well as the risk management. [...]
[...] The Volcker Rule focuses on preventing the banking institutions from involvement in the market making thus significantly crippling the financial markets in the US. The Volcker Rule on the proprietary trading by the banks would also have the impact of making the operations of the banks to be more risky. The above is due to the fact that the Rule attempts to limit the activities and the roles that the banks can undertake thus limiting the ability of the banking organizations to satisfy the legitimate needs of the different customers. [...]
[...] Moreover, HFT involves near flat or flat positions at the trading day end thus no or little risk is carried overnight. The positions are held for a very little time for instance fractions of seconds or just seconds in some cases. It is important to note that the HFT are mostly used by proprietary trading desks and or firms. Also, the HFT are also characterized with very high levels of turnover in the daily portfolio as well as the high order to trade ratio for instance there is a high number of orders that are cancelled as compared to the executed trade. [...]
[...] The Volcker Rule would thus lead to inefficiencies in the global financial markets as the banks will be prohibited from holding inventories and only engaging in operations when they are explicitly informed by the customers. The above is based on the fact that the banking institutions can only undertake the market making security function effectively when they hold some inventory of the security. The Volcker Rule focuses on preventing the banking institutions from involvement in the market making thus significantly crippling the financial markets in the US. [...]
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