Implications of High-Frequency Trading for Security Markets

Oliver Linton and Soheil Mahmoodzadeh ()
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Soheil Mahmoodzadeh: Faculty of Economics, University of Cambridge, Cambridge CB3 9DD, United Kingdom

Annual Review of Economics, 2018, vol. 10, issue 1, 237-259

Abstract: High-frequency trading (HFT) has grown substantially in recent years due to fast-paced technological developments and their rapid uptake, particularly in equity markets. This review investigates how HFT could evolve and, by developing a robust understanding of its effects, identifies potential risks and opportunities that HFT could present in terms of financial stability and other market outcomes such as volatility, liquidity, price efficiency, and price discovery. Despite commonly held negative perceptions, the available evidence indicates that HFT and algorithmic trading may have several beneficial effects on markets. However, these types of trading may cause instabilities in financial markets in specific circumstances. Carefully chosen regulatory measures are needed to address concerns in the shorter term. However, further work is needed to inform policies in the longer term, particularly in view of likely uncertainties and lack of data. This work will be vital in supporting evidence-based regulation in this controversial and rapidly evolving field.

Keywords: flash crash; high-frequency trading; liquidity; literature survey; volatility (search for similar items in EconPapers)
JEL-codes: G1 G2 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Implications of High-Frequency Trading for Security Markets (2018)
Working Paper: Implications of high-frequency trading for security markets (2018)
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