High-Frequency Trading and Systemic Risk: A Structured Review of Findings and Policies

Antonio Sánchez Serrano

Review of Economics, 2020, vol. 71, issue 3, 169-195

Abstract: A wider use of technology has contributed to the rapid growth of trading in stock markets in the last decades, resulting in an increase in the number of participants and a sharp decline in the price of information. High-frequency trading could be seen as a manifestation of this development. A review of the main findings in the academic literature leads to the identification of four main systemic vulnerabilities related to high-frequency trading: (i) adverse selection in orders, with the potential of crowding-out non-HFT market makers in times of stress; (ii) correlation of positions and herd behaviour; (iii) market power that, via technological costs, may impose barriers to entry; and (iv) negative contribution, in some circumstances, to price discovery. The first vulnerability could create systemic risk and several scholars have discussed the introduction of a limit in the speed of trading to address it. This could also contribute to reduce market power of high-frequency traders and over-investment in information technologies. Despite intense research efforts, further data and research is still needed to better understand these vulnerabilities and the adequacy of policies to address them.

Keywords: high frequency trading; systemic risk; market-making; markets microstructure (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1515/roe-2020-0028

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