HFT misjudged? : Lynn Strongin Dodds

After being a target of abuse for so many years, it must have been heartening for the high frequency trading community to read something that extolled their virtues. A recent working paper by three US academics – Jonathan Brogaard, Terrence Hendershott and Ryan Riordan – found said these traders not only improved price setting and helped reduce “noise”, or short-term volatility in markets, but they also warned regulators that introducing measures to curb their activities “could result in less efficient markets”.

This isn’t the first of its kind as there have been a slew of academic probes into the practice which accounts for half the volume of US equity trading and 35% Europe. A widely cited UK-commissioned “Foresight” report, for example, published a year ago, also found high-frequency traders had improved liquidity and cut transaction costs but called for a tighter grip around the sudden swings in markets. Many blamed HFT rapid fire technology for the so-called “flash crash” of May 6 2010, when US equity indices plummeted in a matter of minutes only to rally sharply.

The big question is whether regulators will heed the academic’s recommendations. After all, the ECB published the report even if it did stress that the views were those of the authors and not necessarily theirs. It was though put on the website in the run-up to the European Parliament debating on new regulations on HFT for MiFID Review. There has been bad blood between it and the EU Parliament over how much accountability the Central Bank should have. Surely though politics would not get in the way of the regulator making a decision?

Lynn Strongin Dodds

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