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High Frequency Trading and Price Discovery
Report

High Frequency Trading and Price Discovery

ECB, 2013

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Editorial Rating

7

Qualities

  • Innovative

Recommendation

The May 6, 2010, “flash crash” and other past trading glitches have led policy makers to question the effects of high-frequency trading on markets. Coding issues and faulty algorithms have clearly ignited some notable incidents. However, trading mistakes caused problems in markets long before servers began executing trades in microseconds. Finance experts Jonathan Brogaard, Terrence Hendershott and Ryan Riordan offer a useful look into the day-to-day reality of high-frequency trading. Although their report will prove hard work for anyone but specialists, getAbstract recommends it for its valuable analysis of the effects of such trading.

Take-Aways

  • High-frequency traders (HFTs) constitute “a new type of electronic intermediary” that has, to some extent, replaced human market makers as providers of liquidity.
  • Distinguish non-high-frequency traders (nHFTs) from HFTs, who may engage in diverse trading strategies for their own account or as brokers for third parties, is not always easy.
  • HFTs improve price discovery by trading against “transitory price movements” or “noise.” They boost liquidity in times of market stress.

About the Authors

Jonathan Brogaard is an assistant professor of finance at the University of Washington. Terrence Hendershott is an associate professor at the University of California at Berkeley. Ryan Riordan is an assistant professor at the University of Ontario Institute of Technology.