HIGH FREQUENCY TRADING

Abstract

This paper is going to discuss the role of High Frequency Trading (HTF) in financial market and whether it helps the economy or if it is obstructing other agents in the market. HFT is a subset of the algorithmic trading (‘AT’) distinguished by the speed at which it processes and determines plays in the market. This is due to the sophisticated technology components that are reducing the latency, the time occurring between when the order is placed and when it is executed. The analysis starts from current knowledge of HFT and why its introduction was so revolutionary in the way trading is done today, changing its perception over time. HFT is not just algorithms that help execute orders, but brains that think on their own, making decisions in milliseconds backed by machine learning based on proprietary strategies programmed by a firm. Characterizing the HFT strategies could give an insight into the motives for trading, which could impact market quality, also providing evidence on intraday return predictability. The regulatory and real effects on the market, taking into consideration the so-called flash-crash, particularly the one that occurred on May 6, 2010, will be discussed further in this paper. Ultimately, after the analysis of pros and cons are evaluated, this paper will conclude with the implications surrounding HFT and fairness in the market – which is the main crux of this paper. Human beings are supposed to know what it is right and what it is wrong but trying to put a border between the two of them is not definitively clear with regards to HFT. Using this assumption, a study will be conducted to see if the assumption holds true and whether fairness in the market is adversely affected by HFT.