Market Microstructure and High-Frequency Market Manipulation

Market Microstructure and High-Frequency Market Manipulation

Many investors are rightfully concerned about market manipulation — after all, who wants to be taken for a ride? High-frequency market manipulation proved to be particularly disconcerting to many investors as it is evolutionary, difficult to detect without appropriate tools, and is still not universally understood. Adding even more complexity to investor decision-making is the explosion of various types of exchanges and other alternative trading venues, some known as dark pools. As my latest research shows, however, certain types of trading venues can be more suited to specific classes of investors. Investors may further select to trade on venues that minimize undesired market characteristics, including high-frequency market manipulation.

In the U.S. today, there are 16 exchanges for equities, commodities and options, as well as countless alternative trading venues (ATS) that include lightly regulated dark pools and brokers’ own “internalizers” — matching engines that trade offsetting orders placed by a broker’s customers. Each trading venue has its own approach to placing orders and navigating the methodologies is no easy feat. Among equity exchanges, for example, some use price-time priority and some pro-rata. Within the price-time priority category, some platforms are known as “normal,” while others are “inverted.” The differences are non-trivial, but luckily, not complicated, as I discuss in my new book, High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems, 2nd edition.

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One Response to Market Microstructure and High-Frequency Market Manipulation

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