Financial innovation, HFT High Frequency Trading, social impacts, market mechanism, volatility, investment, financial transactions, competitive edge, subprime crisis, Apple, liquidity, flash crash, funds
A Financial Times article argues that HFT is beneficial for society, and that banning HFT from use would increase volatility. I agree with this point of view, as algorithms democratized trading by allowing a direct access to the markets and decreasing the costs of the transactions. Also, investors using HFT are simply seeking a competitive edge as it is the case in many other markets, and the 2008 flash crash was not due to HFT but to a market mechanism. However, I disagree with the idea that volatility would rise if investors stopped using HFT, as historical data shows that HFT generally doesn't affect volatility.
[...] The surge in online trading, for instance, is a way of increasing liquidity in the markets, as they are more potential buyers and sellers. This should be seen as a positive effect rather than a problem created by algorithms. Sources: Lowrey, J. (2012) "Social Benefits of High Frequency Trading: Pulling the plug on algorithms will increase volatility", Financial Times 19 August https://www.ft.com/content/7b1a0d2c-e207-11e1-8e9d- 00144feab49a [HYPERLINK: https://www.ft.com/content/7b1a0d2c-e207-11e1-8e9d-00144feab49a] Gomber P., Arndt B., Lutat M., Uhle T. (2011) "High-Frequency Trading", Goethe University, Frankfurt Biais B., Fourcault T., Moinas S. [...]
[...] When Icahn announced that Apple was an undervalued company and that larger buybacks should be done, this led to a rise of the Apple share price, as people were expecting the share price to go up, allowing them to buy stocks now and sell them later at a profit, in a short period of time. To conclude, HFT brings additional liquidity, efficiency and quality to the financial markets. However, historical data proves that it doesn't affect market volatility in most cases. Even if the use of HFT should be supervised and regulated, it is a legitimate tool to make higher returns on trades. HFT is an important financial innovation, which is beneficial for the markets and therefore society as a whole. [...]
[...] Investors using this technology can then raise their gains from trade and be able to observe market information before slow traders (Biais, Fourcault and Moinas, 2012). However, this generates adverse selection, and thus negative externalities. When institutions such as investment banks and hedge funds invest in fast-trading technologies, they don't internalize these negative externalities (Biais, Fourcault and Moinas, 2012). "However, utilitarian welfare is maximized by having a single market type on which fast and slow traders coexist and ii) Pigovian taxes on investment in the fast trading technology" (Biais, Fourcault and Moinas, 2012). [...]
[...] Financial Innovation Essay: High Frequency Trading and its social impacts A Financial Times article argues that HFT is beneficial for society, and that banning HFT from use would increase volatility. I agree with this point of view, as algorithms democratized trading by allowing a direct access to the markets and decreasing the costs of the transactions. Also, investors using HFT are simply seeking a competitive edge as it is the case in many other markets, and the 2008 flash crash was not due to HFT but to a market mechanism. [...]
[...] Judging from the volatility index of the SP 500 from 1990 to 2016, the introduction of HFT around 2009 didn't change anything: volatility seems similar, in comparison to the 1990s. There is a sharp rise in volatility in 2008. However this is explained by the subprime crisis in the US, which spread globally (Yahoo Finance, 2016). Also, HFT can affect volatility in some cases, by driving stock prices up or down, through the front running of large buys and sales of institutional investors (Zhang, 2010). [...]
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