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Definition, Benefits and Risks of High-Frequency Trading
[Vymezení, přínosy a rizika vysokofrekvenčního obchodování]

Author

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  • Jakub Kučera

Abstract

The paper deals with high-frequency algorithmic trading (HFT), which has recently come to dominate some financial markets, e.g. the US equity markets. The author first attempts to establish a clear definition of high-frequency trading. With the most important characteristics having been analysed, it is concluded that such a definition would not bring more clarity into the debate over HFT. Strategies pursued by traders should be given consideration instead. On this account, the text proceeds with the examination of the most common strategies. Afterwards, the question is raised whether the rise of high-frequency algorithmic traders has resulted in more efficient financial markets. Based on robust evidence from academic research, important market participants and exchanges, HFT indeed seems to improve market quality by narrowing spreads and providing additional liquidity - the market-making strategy is mainly responsible for the latter. Issues such as possible system risks (flash crashes, herd behaviour) are also discussed.

Suggested Citation

  • Jakub Kučera, 2013. "Definition, Benefits and Risks of High-Frequency Trading [Vymezení, přínosy a rizika vysokofrekvenčního obchodování]," Acta Oeconomica Pragensia, Prague University of Economics and Business, vol. 2013(5), pages 3-30.
    • Handle: RePEc:prg:jnlaop:v:2013:y:2013:i:5:id:413:p:3-30
    DOI: 10.18267/j.aop.413
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    References listed on IDEAS

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    1. Menkveld, Albert J., 2013. "High frequency trading and the new market makers," Journal of Financial Markets, Elsevier, vol. 16(4), pages 712-740.
    2. Jonathan Brogaard & Terrence Hendershott & Ryan Riordan, 2014. "High-Frequency Trading and Price Discovery," The Review of Financial Studies, Society for Financial Studies, vol. 27(8), pages 2267-2306.
    3. Terrence Hendershott & Charles M. Jones & Albert J. Menkveld, 2011. "Does Algorithmic Trading Improve Liquidity?," Journal of Finance, American Finance Association, vol. 66(1), pages 1-33, February.
    4. Hagströmer, Björn & Nordén, Lars, 2013. "The diversity of high-frequency traders," Journal of Financial Markets, Elsevier, vol. 16(4), pages 741-770.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    high-frequency trading; algorithmic trading; definition; market quality;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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