July 27th, 2010 – Despite the claims of questionable practices and accusations by many that high frequency traders cause market volatility, a recently released report by Woodbine Associates finds that high frequency trading has actually had the opposite effect, reducing trade order volatility and improving the quality of execution for the securities studied.
The report, titled “High-Frequency Trading: The Impact of High Frequency Strategies on Spreads and Volatility in Highly Liquid U.S. Equities,” spanned a period of two years from 2008 to 2009 and tracked both trade execution quality and price movement for the top 39 most heavily traded securities in the U.S. equity market. It’s the latest of just a handful of reports that have examined the effect of high frequency trading in such depth and detail, and one that lends additional credibility to the practice.
Report Conclusions
- High frequency trading strategies improved execution quality and reduced trade volatility.
- Market impact overall, whenever experienced as a result of high frequency activity, has been temporary and not long lasting.
- On average, HFT activity has had a beneficial effect on retail investors, traditional market investors, and non-high frequency trading broker/dealers.
Although it hasn’t been universally accepted as the final word in the debate for or against high frequency trading, the Woodbine Associates report adequately defends the practice of high frequency trading as a viable—and beneficial—market strategy, and unintentionally (yet fortuitously) supports an idea that’s been floated by many with regard to the potentially lucrative creation of an exchange-traded fund that would allow individuals to invest in high frequency trading strategies.
Copyright 2010 Lightspeed Financial Inc. All rights reserved. Any comments or statements made herein are not an endorsement of any trading strategy or security and are made for informational purposes only.
