Implications of High-Frequency Trading for Security Markets

Posted: 7 Sep 2018

See all articles by Oliver B. Linton

Oliver B. Linton

University of Cambridge

Soheil Mahmoodzadeh

University of Cambridge - Faculty of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 2018

Abstract

High-frequency trading (HFT) has grown substantially in recent years due to fast-paced technological developments and their rapid uptake, particularly in equity markets. This review investigates how HFT could evolve and, by developing a robust understanding of its effects, identifies potential risks and opportunities that HFT could present in terms of financial stability and other market outcomes such as volatility, liquidity, price efficiency, and price discovery. Despite commonly held negative perceptions, the available evidence indicates that HFT and algorithmic trading may have several beneficial effects on markets. However, these types of trading may cause instabilities in financial markets in specific circumstances. Carefully chosen regulatory measures are needed to address concerns in the shorter term. However, further work is needed to inform policies in the longer term, particularly in view of likely uncertainties and lack of data. This work will be vital in supporting evidence-based regulation in this controversial and rapidly evolving field.

Suggested Citation

Linton, Oliver B. and Mahmoodzadeh, Soheil, Implications of High-Frequency Trading for Security Markets (August 2018). Annual Review of Economics, Vol. 10, pp. 237-259, 2018. Available at SSRN: https://ssrn.com/abstract=3245096 or http://dx.doi.org/10.1146/annurev-economics-063016-104407

Oliver B. Linton (Contact Author)

University of Cambridge ( email )

Faculty of Economics
Cambridge, CB3 9DD
United Kingdom

Soheil Mahmoodzadeh

University of Cambridge - Faculty of Economics ( email )

Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

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