In Zeev's Honor, Plan the Trade and Trade the Plan

[basserdan]

New Study Shows HFT Hurts Long-Term Institutional Investors

By Floating Path
October 9, 2013



The negative effects of high frequency trading (HFT) are sometimes obvious when it comes to blatant manipulation or flash crashes, however the incremental effects of HFT on longer-term investors is something that is more difficult to quantify ( http://tinyurl.com/mxcvftb ).

A paper published by Professor Lin Tong from the University of Iowa suggests that high frequency trading often has a negative effect on institutional trading taking the other side. His study, A Blessing or a Curse? The Impact of High Frequency Trading on Institutional Investors, looked at trade data from 204 institutions and NASDAQ data on a sample of 120 stocks. As summarized by Themis Trading, the results are quite interesting.

1.HFT activity is positively correlated with execution shortfall.

2.When HFT activity is more intense, institutional investors’ execution shortfall is higher.

3.The increasing effect of HFT activity on execution shortfall is stronger on smaller stocks.

4.When HF traders on the net are buying (selling), it is more costly for institutional investors to sell (buy).

5.Even though HFT activity increases institutional investors’ execution shortfall, it does not provide the benefit of reduced timing delay cost.

While regulation around the world is starting to take notice to HFT ( http://tinyurl.com/n8qq9za ), the U.S. is lagging. On the bright side, the SEC today launched a website ( http://tinyurl.com/n8ho7y8 ) dedicated to publishing data mined by its market-monitoring system MIDAS ( http://tinyurl.com/ou7bsh3 ). As more studies like this are published and more regulators take notice, perhaps we are taking the first steps towards ensuring an orderly, fair, and honest market for all participants.

http://www.valuewalk.com/2013/10/hft-study/