High-frequency Trading: Review of the Literature and Regulatory Initiatives around the World

Abstract

This paper provides a review of the literature on high‐frequency trading and discusses various initiatives taken by regulatory authorities around the world to address its potential detrimental effects on market quality and investor welfare. Empirical evidence to date generally suggests that high‐frequency trading has improved market quality during normal times. What is not clear is the role of high‐frequency traders during episodic periods of market crash and extreme volatility. A fruitful area of future research may be a comparative analysis of the role of high‐frequency traders and the efficacy of various regulatory initiatives across periods of varying market conditions.

Impact and recovery process of mini flash crashes: An empirical study

“…One possible reason of this development is an increased competition of high frequency traders among each other, with the consequence of reduced earning opportunities [ 40 , 41 ]. The market situation after the financial crisis as compared to 2007/2008 is also altered due to changed market regulation rules [ 42 ], some of them were introduced to reduce market risks, especially during flash crashes [ 16 ]. However, the success of regulatory interventions in reducing such risks has been found to be limited [ 42 ].…”

“…The market situation after the financial crisis as compared to 2007/2008 is also altered due to changed market regulation rules [ 42 ], some of them were introduced to reduce market risks, especially during flash crashes [ 16 ]. However, the success of regulatory interventions in reducing such risks has been found to be limited [ 42 ]. There was another large flash crash of U.S. stocks on February 5 in 2018, and further large flash crashes occurred around the world.…”

What FinTech Can Learn from High-Frequency Trading: Economic Consequences, Open Issues and Future of Corporate Disclosure

“…On 1 August 2012, the French government introduced a financial transaction tax applicable on cancelled orders made by high-frequency traders where all orders cancelled or modified within half-second time span are taxed. The tax of 0.01% is applied on modified or cancelled orders of French HFT when OTR is greater than five (Chung et al 2016), even if in this case it did not have any negative on market quality, both in term of trading volume, volatility, spreads and depth (Colliard and Hoffmann 2017).…”

Performance of Active and Passive Management of Korea's NPS Funds

“…The monthly turnover of index funds was extraordinarily high (16.5%) compared to the turnover in other fund categories. Until 2009, pension index funds were exempt from securities transaction taxes, so most index funds adopted high frequency index arbitrage strategies to enhance their performance, leading to high turnover (Chung and Lee, ). Compared with the 4.1–8.8% monthly turnover of US institutional products as of 2008, the 3.3–8.4% monthly turnover for NPS funds, excluding index funds, was moderate (Busse et al ., ).…”