The Effect of High Frequency Trading Systems on Financial Markets
On a day described as the ‘Flash Crash’, the U.S stock 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 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 …show more content…
However, against this tide of academic consensus, Professor Frank Zhang of Yale University (2011) concludes “Events can move markets, but high-frequency trading increased the volatility in the overall market”. Regardless of being commonplace among academics and experts that HFT provides some extra liquidity for the market, Zhang suggests that high-frequency traders are in fact largely trading with each other, and not providing any liquidity for traditional investors. Additionally, he finds evidence to suggest that HFT causes stock prices to over react to news about fundamentals, and because this over reaction is subsequently corrected, he believes it delivers direct evidence to support HFT