High-Frequency Trading

High-Frequency Trading
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High-Frequency Trading
One risk of high-frequency trading (HFT) is an increase in volatility. Algorithmic HFT is rampant in modern markets in an attempt to outwit competition. The results intensification of the market conditions (Kenett et al., 2013). The algorithms react intensely, and during boisterous markets, they may expand the bid-ask spreads that prevent firms from being forced to adhere to specific trading positions. This can momentarily alter trading as a whole, leading to reduced liquidity and intensified volatility (Kenett, n.d.). Another risk of HFT is ripple effects resulting from the algorithms. In today’s world, markets are significantly integrated, and asset markets are connected in the global economy. When a meltdown occurs, it can result in ripple effects across markets and cause a chain reaction on asset classes (Kenett et al., 2013). An example is the collapse of crude oil prices. HFT is also risky because it creates market uncertainty. First, it leads to extensive market volatility, which can create uncertainty among stock investors in the short-term, and affects consumer behavior in the long run. For example, when there is market volatility, large investors cut their trading to reduce the risk, which puts more pressure on the markets (Kenett et al., 2013). If things escalate, it creates a negative loop that shakes consumer confidence owing to the degradation of the stock market.
Yes, HFT destabilizes financial markets. HFT often results in synchronized prices in the financial markets, which causes the value of associated securities in the market to alter simultaneously (Gerig, 2015). While price synchronization is advantageous in markets, it can also lead to harmful effects. The algorithms used in HFT allows prices to be tightly connected, which increases the risk of localized errors to emerge through the f...