As discussed at High-Frequency Trading Leaders Forum 2011 New York, there is indeed independent research that shows that high-frequency trading has a positive impact on global capital markets by increasing liquidity and reducing price volatility, findings that could allay some of the popular and political concerns over the strategy.
As reported by The Wall Street Journal’s Michelle Price, the research, published Monday by the Capital Markets Cooperative Research Centre, based in Australia, counters arguments from critics, who say the practice creates volatility and increases systemic risk.
Alex Frino, professor of finance and chief executive of the research group, said high-frequency trading “may actually play a role in decreasing excessive price volatility.”
He added: “Part of this function is the way (high-frequency trading) algorithms identify trading opportunities—they’re built to recognize when prices are abnormally high or low, and their response to this naturally pushes prices back towards equilibrium.”
High-frequency trading is a form of super-fast and sophisticated trading that uses quantitative strategies to execute trades in a fraction of a second and, in some cases, to exploit tiny price discrepancies across platforms.