The dramatic speed of financial transactions can be matched only by the intensity of the controversy surrounding it, especially when it comes to high-frequency trading.
In markets for stocks, futures and foreign exchange, transactions take place in milliseconds to microseconds (or even nanoseconds). Markets for fixed-income securities including corporate bonds and over-the-counter derivatives such as interest-rate swaps are also catching up quickly by adopting electronic trading.
To many, the “Flash Crash” of May 2010 was a wake-up call for reevaluating market structure. A series of technology glitches proved to be highly costly for some brokers, proprietary firms and marketplaces in terms of both profits and reputation. The SEC launched investigations into HFT firms and their strategies. French regulators introduced a financial transaction tax. Author Michael Lewis wrote “Flash Boys.” The list goes on.
With this fallout comes important economic questions: What are the costs and benefits to investors for speeding up trading? Is there an “optimal” trading frequency at which the financial market should operate? And does a faster market affect one group of investors more than another?
In a recent research paper, “Welfare and Optimal Trading Frequency in Dynamic Double Auctions,” my co-author Prof. Songzi Du (Simon Fraser University) and I attempt to answer these questions.
Read the full post at MarketWatch.
Haoxiang Zhu is an Assistant Professor of Finance at the MIT Sloan School of Management.