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October 1, 2012

High frequency traders’ claims refuted by studies

“Advocates of high frequency trading (HFT) like to point to the advantages it brings in terms of market efficiency.

The Futures Industry Association Principal Traders Group, a trade association, which includes high frequency traders, said in a September statement that “as markets have become more automated and competitive … trading costs are lower, markets are deeper and more liquid, and prices better reflect information about the value of stocks and commodities.”

But recent testimony before the US Senate Banking Committee and a new study by the Federal Reserve Bank of Chicago both paint HFT in a rather different light.

Unsurprisingly, the Chicago Fed found there were more out-of-control algorithms than they had anticipated. The most high profile recent example was on August 1 this year, when Knight Capital lost $440m in 45 minutes because of a rogue HFT algorithm.


The Chicago Fed’s study exposes a lack of controls, but other critics also call into question the claimed efficiency advantages. Giving testimony before the US Senate Banking Committee in September, David Lauer, a former trader and currently a consultant on HFT at Better Markets, cited several independent academic and industry studies showing an adverse effect from HFT on spreads, volatility and price impact.”


Read Vince Heaney’s full article here

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