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Fair and Efficient Markets

HFT: Markets that are Fair and Efficient for all Investors

Every market participant must have fair access to the stock market.There can be no tool, preference, order type, product or service that one group of investors can obtain exclusively from an exchange, that is forbidden to other groups of investors.These rules are strictly enforced by exchanges and regulatory agencies to ensure the integrity of the markets.In addition to these regulations, advances in HFT technology have reduced spreads (the cost to trade) and automated the previously manual process of trading, helping to democratize the markets with near instant access available to all investors.

Industry Support for the Role of HFT in Promoting Markets Fair and Efficient

“The truth is that the markets are probably more fair and efficient than ever before and that the winners were those who followed the rules and innovated faster than the sleepy crowd who finished last and elected to pursue a scorched earth policy instead of getting back in the game and competing fairly.”
Ian Bandeen, Founder and past CEO of the Canadian Securities Exchange

“Our paper is the first to provide an empirical assessment as to whether HFT has a positive effect on market fairness. Taken together with the existing evidence that HFT reduces transactions costs and enhances price discovery, the usual proxies for market efficiency, we demonstrate not only how market fairness can be operationalized, but how it can be used in market structure decisions.”
– York University / University of New South Wales summary of the study “High Frequency Trading and End-of-Day Price Dislocation”

“Due to the rise of high-frequency trading, investors both large and small enjoy a deeper pool of potential buyers and sellers, and a wider variety of ways to execute trades…investors now enjoy faster, more reliable execution technology and lower execution fees than ever before. All of that contributes significantly to market liquidity, a critical measure of market health and something all investors value.”
Arthur Levitt, former SEC Chairman from 1993-2001

“The stock market and the nature of investing constantly evolve with technology. In many ways technology has made finance more democratic from wider, cheaper, better-diversified stock ownership while speculation has gotten more cut-throat and competitive. The market allows for both of these investors [HFT traders and small investors] to coexist.”
Allison Schrager, Dimensional Fund Advisors researcher

Further Resources

July 22, 2016: How Rigged Are Stock Markets? Evidence from Microsecond Timestamps
University of California, Berkeley Professors Robert P. Bartlett, III and Justin McCrary use new timestamp data from the two Securities Information Processors (SIPs) to examine SIP reporting latencies for quote and trade reports. Trading surrounding SIP-priced trades shows little evidence that fast traders initiate these liquidity-taking orders to pick-off stale quotes.  These findings contradict claims that fast traders systematically exploit traders who transact at the SIP NBBO.

December 21, 2015: High Frequency Trading: Fact and Fiction
Dr. Stephen Kirchner, an economist with the Australian Financial Markets Association, found that computer-based trading is widely misunderstood. In particular, it has been claimed that high frequency trading imposes costs on retail investors. In fact, algorithmic trading, including HFT, enhances market quality and efficiency by increasing liquidity, lowering bid-ask spreads, facilitating price discovery and lowering the volatility of the prices for financial assets. By lowering transaction costs, HFT raises rates of return to investors and boosts asset prices.

April 2014: An Analysis of Global HFT Regulation
Professors Holly A. Bell and Harrison Searles, of the Mercatus Center at George Mason University, find little evidence for the existence of a market failure that requires additional aggressive regulation, or suggesting that government intervention will improve market integrity or “fairness” better than the market and existing regulation already have.

October 2013: High Frequency Trading and End-Of-Day Price Dislocation
Professors Douglas Cumming, Feng Zhan and Michael Aitken published in December 2013 from the Capital Markets Cooperative Research Centre (CMCRC) that finds the presence of high frequency traders improves market fairness by reducing end of day price dislocation.

“High-frequency traders provide a vital service to all market participants…HFT helps to create efficient markets by facilitating price formation, lowering the cost of trading and improving the linkage between markets."

BlackRock Viewpoint, June 2011

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