High‐frequency trading: Definition, implications, and controversies

Abstract

High-frequency trading (HFT) is an important component of stock market activity on major exchanges. In the United States, HFT contributed approximately 52% of total equity trading in 2018, with an estimated value of more than US$17 trillion. However, to date, there is no standard definition of HFT, and how it is perceived or viewed depends on the underlying criteria set by regulators. The lack of a uniform identification for HFT leads to problems, such as research complications, that lead to somewhat conflicting conclusions as to the effect of HFT on equity markets in general and the market microstructure in particular. This article presents a survey of the definitions, measurements, mechanisms, empirical evidence, and relevant controversies and issues pertaining to HFT.

The Flash Crash: The Impact of High-Frequency Trading on the Stability of Financial Market

“…Embracing algorithms and lightning-fast networks, HFT platforms can conduct millions of trades in split seconds, offering unparalleled market liquidity. However, HFT also brings potential volatility and systemic vulnerabilities [1]. By the decade's end, HFT accounted for a significant portion of U.S. equity trading volume.…”

High-Frequency Trading (HFT) and Market Quality Research: An Evaluation of the Alternative HFT Proxies

“…A fairly volatile financial market that ensures adequate changes in price to exceed transaction costs and provides ample space so that traders can quickly take in and out from market positions, befits HFTs' need. There are many papers (Aldridge 2013;Biais and Foucault 2014;Gomber et al 2011;O'Hara 2015; The Netherlands Authority for the Financial Markets 2010; Zaharudin et al 2021) that have made attempt to paint a descriptive picture of HFT and have marked a distinction between the working feature of HFT and AT. It reveals that both HFT and AT share some common features but they work on different purpose and capacity.…”

“…The contribution of HFT in equity trading is significantly large across developed financial markets. For example, in the USA, it was approximately 52% of total equity trading in 2018 (Zaharudin et al 2021). HFT is extraordinarily fast and the fastest speed has increased the effectiveness of HFT strategies in the present-day fragmented trading environment (Baldauf and Mollner 2021).…”

“…Moreover, the use of diverse HFT proxies in the absence of a proper standard is creating many concerns. Zaharudin et al (2021) put the right apprehension of using distinct proxies across HFT research: "The lack of a uniform identification for HFT leads to problems, such as research complications, that lead to somewhat conflicting conclusions as to the effect of HFT on equity markets in general and the market microstructure in particular. "…”

Order Routing Decisions for a Fragmented Market: A Review

“…In this section, we will start with the literature on the fragmentation with trading technology innovation and briefly discuss the theoretical prediction and empirical studies about the impact of the technology on the exchanges 18 , namely speed competition and colocation, on the market quality. For a broad discussion on the impact of technology on the financial market, readers may refer to comprehensive reviews by McAleer et al (2015) about econometrics with informatics and data mining and by Menkveld (2016) and Zaharudin et al (2021) about HFT trading. Menkveld (2014) argues that both high-frequency trading (HFT) and market fragmentation resulted from technology innovation.…”