The Effect of High Frequency Trading Systems on Financial Markets Essay

Whilst runniness plays a central role in the functioning of financial marts, it is volatility that can be truly detrimental. in spite of almost universal agreement among academics that HFT improves prices for investors and dampens volatility in equity markets, since the sixth of May 2010 the sector has come under intense scrutiny from regulators. On a day described as the Flash Crash, the U.S cable market experienced one of the most severe price drops in its history. In the matter of five minutes, the Dow Jones Industrial Index declined by 900 points, and and then recouped the balk of those losses within the next 15 minutes. This unprecedented and unexplained volatility has fired public debate ever since.In the aftermath of the US Flash Crash, regulators were quick to pin blame on HFT. Within a week the chairman of the US Securities and Exchange committal determined there was evidence that professional liquidity providers turn of steadytsed out of the market when shares star ted declining exacerbating the fall. Perhaps irrationally, policymakers without any significant evidence believe HFTs pull out of markets at signs of stress, contributing to a sudden loss of liquidity and promoting volatility (Grant, 2011).Moreover, Andrew Haldane points to the flash crash whens he determines that the ever increasing focal ratio of trading is amplifying volatility. In my opinion, in the aftermath of the financial crisis when regulators received so much criticism, I believe they feel they must act immediately, even if they dont know the true problem. I consider this pellucid from calls for increased HFT regulation from US Senator Charles Schumer, who bases his opinion on recent intelligence operation reports (Zerohedge. 2010), rather than academic research or scientific re... ...ttp//blogs.wsj.com/marketbeat/2009/12/08/volcker-praises-the-atm-blasts-finance-execs-experts/. withstand accessed 04/12/11.Jones, R. (2010). Institutional Investor Flash Crash and Cyber War. operable http//hftsecurityrisk.com/category/flash-crash-specific/. last accessed 04/12/11.Pagnotta, E & Philippon, T. (2010). The Welfare Effects of Financial Innovation senior high school Frequency Trading in Equity Markets. on tap(predicate) https//editorialexpress.com/cgi-bin/conference/download.cgi?db_name=SED2011&paper_id=1246. run accessed 04/12/11.Mackenzie, M & Demos, T. (2011). Fears linger of new flash crash. Available http//www.ft.com/cms/s/0/d18f3d28-7735-11e0-aed6-00144feabdc0.htmlaxzz1fPJAVyJm. Last accessed 04/12/11.Geithner, T. (2007). Liquidity and Financial Markets. Available http//www.newyorkfed.org/newsevents/speeches/2007/gei070228.html. Last accessed 05/12/11.