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April 3, 2013

High-speed trading fans ignore risk

Is sponsored academic research a threat to our financial markets or an important innovation that benefits today’s investors? Judging by POLITICO’s recent op-ed “Correcting the Record on High-Frequency Trading” (March 20), by Charles M. Jones, a professor of finance and economics at Columbia Business School, investors should be concerned.

The paper was sponsored by a grant from hedge fund Citadel LLC, one of the country’s top high-speed trading firms. Jones concludes that high-frequency trading is beneficial to the markets. He says it adds liquidity and reduces bid-ask spreads, making it easier for all investors to trade at the price they want.

Jones reached his conclusions by reviewing 30 existing research papers. Many of the research papers that he sourced were written by academics largely sympathetic to HFT. That compares to a 2012 bibliography from R.T. Leuchtkafer, who has written SEC market structure comment letters in which he predicted the behavior of HFT firms during the “flash crash” of 2010. Leuchtkafer found 60 academic papers on HFT related subjects — twice as many as Jones — and almost all of them raised serious questions about HFT.” 

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Read Sal Arnuk and Joe Saluzzi’s full Politico Op Ed here

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