HiGame

Cognitive Shift, Trading Costs, Cozy Relationships and Full Disclosure



Across the wider world, Wall Street’s speed demons are all too often cast as the villains of the stock market.

As computerized trading firms have become the dominant buyers and sellers of equities, they’ve been blamed for exploiting investors and causing bouts of extreme volatility, and were famously portrayed by Michael Lewis as part of a rigged system in “Flash Boys.” The Bundesbank said they can help trigger flash crashes and Hillary Clinton made policing them an election issue.

But in academic circles at least, high-frequency traders are more often treated like heroes.

Since 2013, positive research has outnumbered negative by a 2-1 margin, a database search of the 30 most-cited papers on HFTs showed. Researchers found automated firms reduced trading costs, and contrary to popular opinion, improved market depth and stability. It’s a turnaround from the previous three years, when most studies were inconclusive or negative. The results were compiled with Microsoft’s search engine for academic research.

“As a whole, the literature strongly supports HFTs being a net positive,” said Jonathan Brogaard, a professor at the University of Washington and co-author of “High-Frequency Trading and Price Discovery,” which has been mentioned by other researchers more than 350 times as the most-cited paper.

Soon-to-be published research by VU University Amsterdam’s Albert Menkveld also indicates trading costs have plunged more than 50 percent as electronic markets and HFTs emerged in the past decade.

“Years ago, somebody said ‘high-frequency trading’ and you immediately associated it with detrimental aspects and implications,” said Ryan Larson, the head of U.S. equity trading at RBC Global Asset Management, which oversees $370 billion. “It’s such a naive viewpoint now.”

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