The Need for Speed: Does High-Frequency Trading Make or Break Equity Markets?

Abstract

Advances in technology and introduction of new regulations have transformed the equity market over last few decades, giving rise to a new breed of trading—high-frequency trading (HFT). This article investigates transformations that have shaped today’s equity trading ecology in detail with a particular focus on HFT. HFT accounts for an increasingly significant share of equity trading volumes, and is associated with lower transaction costs, greater liquidity, improved price discovery, and overall market efficiency. At times of increasing order toxicity, however, HFTs may withdraw liquidity due to higher probability of adverse selection. In this new era of equity trading, further research on a complete ecosystem of liquidity provision that ensures full provision of liquidity even during stressed periods is much needed. TOPICS: Fundamental equity analysis, accounting and ratio analysis, technical analysis