IDEAS home Printed from https://ideas.repec.org/a/kap/jbuset/v112y2013i4p585-595.html
   My bibliography  Save this article

Fairness in Financial Markets: The Case of High Frequency Trading

Author

Listed:
  • James Angel
  • Douglas McCabe

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 often implement 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. Copyright Springer Science+Business Media Dordrecht 2013

Suggested Citation

  • James Angel & Douglas McCabe, 2013. "Fairness in Financial Markets: The Case of High Frequency Trading," Journal of Business Ethics, Springer, vol. 112(4), pages 585-595, February.
    • Handle: RePEc:kap:jbuset:v:112:y:2013:i:4:p:585-595
    DOI: 10.1007/s10551-012-1559-0
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s10551-012-1559-0
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s10551-012-1559-0?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Ernst Fehr & Klaus M. Schmidt, 1999. "A Theory of Fairness, Competition, and Cooperation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(3), pages 817-868.
    2. Andrew W. Lo & Harry Mamaysky & Jiang Wang, 2000. "Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation," Journal of Finance, American Finance Association, vol. 55(4), pages 1705-1770, August.
    3. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1986. "Fairness and the Assumptions of Economics," The Journal of Business, University of Chicago Press, vol. 59(4), pages 285-300, October.
    4. Evan Gatev & William N. Goetzmann & K. Geert Rouwenhorst, 2006. "Pairs Trading: Performance of a Relative-Value Arbitrage Rule," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 797-827.
    5. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-741, September.
    6. James Konow, 2003. "Which Is the Fairest One of All? A Positive Analysis of Justice Theories," Journal of Economic Literature, American Economic Association, vol. 41(4), pages 1188-1239, December.
    7. Andrew W. Lo & Harry Mamaysky & Jiang Wang, 2000. "Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation," Journal of Finance, American Finance Association, vol. 55(4), pages 1705-1765, August.
    8. Rabin, Matthew, 1993. "Incorporating Fairness into Game Theory and Economics," American Economic Review, American Economic Association, vol. 83(5), pages 1281-1302, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Croson, Rachel & Konow, James, 2009. "Social preferences and moral biases," Journal of Economic Behavior & Organization, Elsevier, vol. 69(3), pages 201-212, March.
    2. Shintaro Tamate, 2015. "External Norms and Systematically Observed Norms," The Japanese Economic Review, Japanese Economic Association, vol. 66(2), pages 247-259, June.
    3. Croson, Rachel & Konow, James, 2007. "Double Standards: Social Preferences and Moral Biases," MPRA Paper 2729, University Library of Munich, Germany.
    4. Antonides, Gerrit & Kroft, Maaike, 2005. "Fairness judgments in household decision making," Journal of Economic Psychology, Elsevier, vol. 26(6), pages 902-913, December.
    5. Gill, David & Stone, Rebecca, 2010. "Fairness and desert in tournaments," Games and Economic Behavior, Elsevier, vol. 69(2), pages 346-364, July.
    6. Matthias Strifler & Thomas Beissinger, 2016. "Fairness Considerations in Labor Union Wage Setting – A Theoretical Analysis," Scottish Journal of Political Economy, Scottish Economic Society, vol. 63(3), pages 303-330, July.
    7. Bruno S. Frey & David A. Savage & Benno Torgler, 2011. "Behavior under Extreme Conditions: The Titanic Disaster," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 209-222, Winter.
    8. Konow, James, 2001. "Fair and square: the four sides of distributive justice," Journal of Economic Behavior & Organization, Elsevier, vol. 46(2), pages 137-164, October.
    9. Bart J. Wilson, 2012. "Contra Private Fairness," American Journal of Economics and Sociology, Wiley Blackwell, vol. 71(2), pages 407-435, April.
    10. Dai, Chifeng, 2009. "The appeals process in principal-agent relationships," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 451-462, August.
    11. Halbheer, Daniel & Bertini, Marco & Buehler, Stefan, 2018. "Consumer Resistance," HEC Research Papers Series 1251, HEC Paris, revised 16 Feb 2018.
    12. Gill, David & Stone, Rebecca, 2009. "Fairness and desert in tournaments," Discussion Paper Series In Economics And Econometrics 0903, Economics Division, School of Social Sciences, University of Southampton.
    13. Pfeifer, Christian, 2004. "Fairness und Kündigungen : eine theoretische und empirische Analyse (Fairness and layoffs * a theoretical and empirical analysis)," Zeitschrift für ArbeitsmarktForschung - Journal for Labour Market Research, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 37(2), pages 127-145.
    14. Elena Cettolin & Arno Riedl, 2017. "Justice Under Uncertainty," Management Science, INFORMS, vol. 63(11), pages 3739-3759, November.
    15. Gary Charness, 2004. "Attribution and Reciprocity in an Experimental Labor Market," Journal of Labor Economics, University of Chicago Press, vol. 22(3), pages 665-688, July.
    16. Dorothea Alewell & Andreas Nicklisch, 2006. "Wage Differentials, Fairness, and Social Comparison: An experimental study of the Co-Employment of Permanent and Temporary Agency Workers†," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2006_8, Max Planck Institute for Research on Collective Goods.
    17. Committee, Nobel Prize, 2017. "Richard H. Thaler: Integrating Economics with Psychology," Nobel Prize in Economics documents 2017-1, Nobel Prize Committee.
    18. Alewell, Dorothea & Nicklisch, Andreas, 2009. "Wage differentials and social comparison: An experimental study of interrelated ultimatum bargaining," International Review of Law and Economics, Elsevier, vol. 29(3), pages 210-220, September.
    19. Pfeifer, Christian, 2004. "Fairness und Kündigungen : eine theoretische und empirische Analyse (Fairness and layoffs * a theoretical and empirical analysis)," Zeitschrift für ArbeitsmarktForschung - Journal for Labour Market Research, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 37(2), pages 127-145.
    20. Breitmoser, Yves & Vorjohann, Pauline, 2018. "Welfare-Based Altruism," Rationality and Competition Discussion Paper Series 89, CRC TRR 190 Rationality and Competition.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:jbuset:v:112:y:2013:i:4:p:585-595. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.