Definition, Benefits and Risks of High-Frequency Trading

Vymezení, přínosy a rizika vysokofrekvenčního obchodování

Jakub Kucera

Acta Oeconomica Pragensia, 2013, vol. 2013, issue 5, 3-30

Abstract: The paper deals with high-frequency algorithmic trading (HFT), which has recently come to dominate some financial markets, e.g. the US equity markets. The author first attempts to establish a clear definition of high-frequency trading. With the most important characteristics having been analysed, it is concluded that such a definition would not bring more clarity into the debate over HFT. Strategies pursued by traders should be given consideration instead. On this account, the text proceeds with the examination of the most common strategies. Afterwards, the question is raised whether the rise of high-frequency algorithmic traders has resulted in more efficient financial markets. Based on robust evidence from academic research, important market participants and exchanges, HFT indeed seems to improve market quality by narrowing spreads and providing additional liquidity - the market-making strategy is mainly responsible for the latter. Issues such as possible system risks (flash crashes, herd behaviour) are also discussed.

Keywords: high-frequency trading; algorithmic trading; definition; market quality (search for similar items in EconPapers)
JEL-codes: G10 G14 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.18267/j.aop.413

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