HFT accounts for over two-thirds of equity market turnover by volume in the United States, and 35% by volume in Europe
High frequency trading (HFT) drives modern securities markets. The rapid growth of HFT as a trading strategy, its highly technical, algorithm-dependent nature and its potential for causing financial disruption raises challenging issues for markets and for regulators.
For a short – for the topic – and anecdotal introduction to HFT, see this July 2011 speech, “The race to zero”, by Andrew Haldane of the Bank of England. This includes the stimulating but seemingly apocryphal story that:
In 2003, a US trading firm became insolvent in 16 seconds when an employee inadvertently turned an algorithm on. It took the company 47 minutes to realise it had gone bust.
For a more detailed discussion of how regulators may respond to HFT, see IOSCO’s July 2011 paper “Regulatory issues raised by the impact of technological changes on market integrity and efficiency”.
UPDATE 12 August 2011: The European Securities and Markets Authority (ESMA) published a consultation paper on 20 July 2011 titled “Guidelines on systems and controls in a highly automated trading environment for trading platforms, investment firms and competent authorites”. The consultation paper sets out ESMA’s proposals to address challenges raised by HFT. The consultation paper is here and the accompanying press release is here.
UPDATE 8 September 2011: The UK Government’s Foresight Project on The Future of Computer Trading in Financial Markets has published a working paper on the effect of computer trading on financial stability and on the benefits that computer trading has had on liquidity, price efficiency and transaction costs.
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