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Linton, O. and Mahmoodzadeh, S.

Implications of High-Frequency Trading for Security Markets

WP Number: 1801

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 paper investigates how HFT could evolve and, by developing a robust understanding of its effects, to identify potential risks and opportunities that it 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 (AT) may have several beneficial effects on markets. However, they 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 will be vital to support evidence-based regulation in this controversial and rapidly evolving field.

Author links: Oliver Linton  

PDF: wp1801.pdf

Open Access Link: 10.17863/CAM.21802

Theme: empirical

Published Version of Paper: Implications of High-Frequency Trading for Security Markets, Linton, O. and Mahmoodzadeh, S., Annual Review of Economics (2018)