Algorithmic and high-frequency trading positive for markets, says UK report

3140According to Hedge Funds Review’s Miranda Alexander-Webber, a recent study by the UK’s Government Office for Science disproves commonly held negative perceptions about high-frequency trading and also looks at the impact algorithmic trading has on markets.

High-frequency trading (HFT) and algorithmic trading (AT) have several beneficial effects on market quality, according to a new study.

The report, entitled Foresight: The future of computer trading in financial markets, was commissioned by the UK Government Office for Science. It examines the effect of computer-based trading (CBT) on financial markets.

The report claims CBT has many positive effects, a finding that could come as a surprise, says Jean-Pierre Zigrand, reader in finance at the London School of Economics and part of the group that oversaw the project. Previous assessments of the effect of high-frequency trading in particular have been negative: the Bank of England’s head of financial stability, Andrew Haldane, linked it to growing systemic risk in 2011 and it was cited as one of the causes of the flash crash in May 2010.

“You really can’t say that since CBT emerged in 2007 and 2008 and markets have been very volatile that CBT is wrong,” Zigrand argues. “We had to try to commission papers that were able to control for the financial crisis to see what the net effect of CBT is.”

The report found HFT has contributed to falling transaction costs, linked fragmented markets together and allowed for information on prices to be delivered more rapidly.

Liquidity has also improved as a result of HFT, with high-frequency traders now providing the bulk of liquidity. The report did note, however, that their use of limited capital combined with ultra-fast speed creates the potential for periodic illiquidity.

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One Response to Algorithmic and high-frequency trading positive for markets, says UK report

  1. Pingback: Algorithmic and high-frequency trading positive for markets, says UK report

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