Another study weighs in on high-frequency trading


There has been no shortage of academic and government research work when it comes to high-frequency trading.

A recent study by a top government economist found that the benefits of such trading are dubious and perhaps detrimental to individual investors. On the other hand, a large-scale meta-study by British researchers, which some tout as the most comprehensive analysis yet of the practice, concluded that many of the alleged harms are overblown.

The study "largely rejected some of the most troubling accusations that have been made about the firms that practice high speed trading, or H.F.T., including charges that they have caused greater volatility in markets and manipulated stock prices."

Is there room for yet more research on this? Apparently there is.

According to a forthcoming study by Mao Ye, a professor of finance at the University of Illinois, the arms race in speed generates "extreme views about high-frequency trading, but if you look at high-frequency trading scientifically, you would see that's it's neither good nor evil," as quoted by

"Although some people think it's good, and others, necessarily, think that it's really bad, our paper shows that neither extreme view is correct. So stock exchanges are investing heavily in order to play what's really a zero-sum game." 

The study has reached some interesting conclusions on quote cancellations. Because the current exchange fee structure only charges for executed trades and not order cancellations, "legitimate traders and investors essentially subsidize high-frequency traders who purposefully cancel orders, reflecting a wealth transfer from low-frequency traders to high-frequency traders. If you increase the speed of trading from micro- to nanoseconds, which is a 1,000 percent increase in speed, there's really no social value to that. There is, however, a lot of private value in that for traders."

For the record, he finds lots of quote stuffing-like activity going on and thinks that high-frequency traders will eventually hit a speed wall, which represents an upper limit on profits. -Jim