Role of high frequency trading in modern financial markets

Role of high frequency trading in modern financial markets Essay example
Finance & Accounting
Pages 23 (5773 words)
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Table of Contents Table of Contents 1 Introduction 2 Modern financial Markets 3 Electronic Trading & Technological Shifts in Trading 5 High Frequency Trading 7 Strategies used by HFT firms 9 Interaction of Humans and Algorithms 10 Impact on the Liquidity, price, transaction costs & Efficiency 12 Financial instability 15 Contribution to Financial Markets 17 Criticism 17 Recent Moves by Regulators 20 Conclusion 21 Works Cited 22 Introduction Over the period of time, international financial markets have advanced to a level where rapid innovation has taken place.


High Frequency Trading or HFT used propriety trading strategies which allow traders and firms to conclude transactions within the micro-seconds. With the help of sophisticated computer algorithms as well as other tools positions can be easily taken and closed within seconds or less than a second to take advantage of the smallest movements in the prices of the securities. HFT firms are not only market makers but they offer critical liquidity to the market also. In 2000, the overall volume of HFT was relatively low however, during the recent years, it witnessed an explosive growth. Firms are increasingly relying on HFT to gain required advantage as well as to remain ahead of the competition. The closely guarded algorithms process large volume of data at really rapid speed and offer cost advantage while having smaller portfolio holding periods. Though the overall number of firms using HFT is relatively low however, the overall volume of trade showed erratic trends with rapid increase as well as decrease in the overall trading activity. ...
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