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Annual Review of Economics

Volume 10, 2018

Implications of High-Frequency Trading for Security Markets

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.

Keyword(s): flash crash, high-frequency trading, JEL G1, JEL G2, liquidity, literature survey, volatility
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/content/journals/10.1146/annurev-economics-063016-104407
2018-08-02
2024-04-20
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/content/journals/10.1146/annurev-economics-063016-104407
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Implications of High-Frequency Trading for Security Markets
Annual Review of Economics 10, 237 (2018); https://doi.org/10.1146/annurev-economics-063016-104407
/content/journals/10.1146/annurev-economics-063016-104407
/content/journals/10.1146/annurev-economics-063016-104407
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