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Implications of High-Frequency Trading for Security Markets

Author

Listed:
  • Oliver Linton

    (Faculty of Economics, University of Cambridge, Cambridge CB3 9DD, United Kingdom)

  • Soheil Mahmoodzadeh

    (Faculty of Economics, University of Cambridge, Cambridge CB3 9DD, United Kingdom)

Abstract
High-frequency trading (HFT) has grown substantially in recent years due to fast-paced technological developments and their rapid uptake, particularly in equity markets. This review investigates how HFT could evolve and, by developing a robust understanding of its effects, identifies potential risks and opportunities that HFT could present in terms of financial stability and other market outcomes such as volatility, liquidity, price efficiency, and price discovery. Despite commonly held negative perceptions, the available evidence indicates that HFT and algorithmic trading may have several beneficial effects on markets. However, these types of trading may cause instabilities in financial markets in specific circumstances. Carefully chosen regulatory measures are needed to address concerns in the shorter term. However, further work is needed to inform policies in the longer term, particularly in view of likely uncertainties and lack of data. This work will be vital in supporting evidence-based regulation in this controversial and rapidly evolving field.

Suggested Citation

  • Oliver Linton & Soheil Mahmoodzadeh, 2018. "Implications of High-Frequency Trading for Security Markets," Annual Review of Economics, Annual Reviews, vol. 10(1), pages 237-259, August.
    • Handle: RePEc:anr:reveco:v:10:y:2018:p:237-259
    DOI: 10.1146/annurev-economics-063016-104407
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    4. Ramos, Henrique Pinto & Perlin, Marcelo Scherer, 2020. "Does algorithmic trading harm liquidity? Evidence from Brazil," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    5. Sánchez Serrano Antonio, 2020. "High-Frequency Trading and Systemic Risk: A Structured Review of Findings and Policies," Review of Economics, De Gruyter, vol. 71(3), pages 169-195, December.
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    8. Gianluca Piero Maria Virgilio, 2019. "High-frequency trading: a literature review," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 33(2), pages 183-208, June.

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    More about this item

    Keywords

    flash crash; high-frequency trading; liquidity; literature survey; volatility;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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