Fairness in Financial Markets: The Case of High Frequency Trading

25 Pages Posted: 11 Jan 2011  

James Angel

Georgetown University - Department of Finance

Douglas M. McCabe

Georgetown University - Department of Management

Date Written: December 21, 2010

Abstract

Recent concern over "high frequency trading" (HFT) has called into question the fairness of the practice. What does it mean for a financial market to be "fair"? We first examine how high frequency trading is actually used. High frequency traders are often implementing traditional beneficial strategies such as market making and arbitrage, although computers can also be used for manipulative strategies as well. We then examine different notions of fairness. Procedural fairness can be viewed from the perspective of equal opportunity, in which all market participants are treated alike. The same rules apply to HFT as to other traders. Another approach to fairness is in the equality of outcomes. Many HFT strategies are beneficial to other market participants, so one cannot categorically denounce the practice as unfair. Other strategies, for both high and low frequency trading, are not. It is thus important to distinguish between the technology and the use of the technology to make judgments on fairness.

Keywords: High Frequency Trading, Market microstructure, fairness, regulation, stock markets

JEL Classification: G10, G18, K22

Suggested Citation

Angel, James and McCabe, Douglas M., Fairness in Financial Markets: The Case of High Frequency Trading (December 21, 2010). Available at SSRN: https://ssrn.com/abstract=1737887 or http://dx.doi.org/10.2139/ssrn.1737887

James J. Angel (Contact Author)

Georgetown University - Department of Finance ( email )

McDonough School of Business
Washington, DC 20057
United States
202-687-3765 (Phone)
202-687-4031 (Fax)

Douglas M. McCabe

Georgetown University - Department of Management ( email )

3700 O Street, NW
Washington, NY 20057
United States

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