High Speed Traders Feast Off Stock Market's Woes
4 stars based on
Due to technological innovation and automation, trading on equity markets has changed dramatically during the past twenty years. Despite increasing liquidity, narrowing spreads, and reducing short-term volatility, HFT can negatively impact market quality and stability, and render marketplaces more vulnerable, especially during crisis periods or under uncertain market conditions. In both the U. The current financial markets settings offer many ways to gain early access to inside information and trade data.
Low-latency news wires and market data feeds, along with co-location, are available to any investor willing to pay for these services. But, as a matter of fact, selling these services gives rise to information asymmetries among investors to the advantage of those, such as high-frequency traders HFTswho actually find themselves in the position of profiting from faster access to market-moving information, due to their superior capacity to process information and trade upon new information before it reaches other investors.
The resulting two-tiered system of information dissemination contrasts the principle of equal access to information underlying financial regulation in the U. On the other hand, insider trading rules seem not to apply to early access to trade data, and subscribing to direct market data feeds from the exchanges does not violate Rule 10b-5, or Reg FD. In the EU, too, where the principle of equal access to information is explicitly embraced by Regulation No.
Information inequalities tolerated or admitted under the current insider trading and high frequency trading news and volatility disclosure rules affect financial market efficiency and challenge the theoretical framework underlying the ECMH.
Due to reduced latency, early access to trade data allows HFTs to anticipate order flow and trade ahead of slower investors. As high frequency trading news and volatility result, market prices may become less informative in the longer run, and negatively affect allocative efficiency. Importantly, HFT is structurally unable to contribute long-term price discovery, since trades are only marginally based upon information concerning securities and their issuers, and fundamental analysis thereof.
Given that the current insider trading regime is—if adequately enforced—suitable for restricting the sale of news wire services that provide early access to corporate information, reducing HFT-related informational inequalities requires focusing on data feeds that grant subscribers faster access to trade information. High frequency trading news and volatility information advance to prevent HFTs from exploiting aggressive trading strategies that ultimately micro-front-run slower investors, may be achieved by either restricting the sale high frequency trading news and volatility market data feeds, or slowing down HFT.
Unlike replacing the current continuous trading regime with a discrete-time trading regime based on frequent batched auctions, restricting the sale of trade data feeds or mandating speed bumps would not demand radical change in current equity markets regulation. But, either of these measures may discourage HFT, and weaken its positive effects in terms of increased liquidity and better short-term price discovery.
Importantly, they would not definitively curb HFT-related risks concerning long-term price accuracy. Supporting allocative efficiency within HFT-dominated equity markets by providing fundamental traders with more frequent and cheaper access to information might be pursued via two different, and to some extent opposite, strategies.
View the discussion thread. Skip high frequency trading news and volatility main content. You are here Blog Home. More from Giovanni Strampelli Gaia Balp.
Matthias Breuer Back in the s, George Stigler called into question whether states should require firms to publicly report their financials. A recent Stigler Center working paper revisits this issue and measures However, firms do not innovate in isolation but rather within an ecosystem of their technological peers, as many