Practical analysis for investment professionals
02 April 2014

High-Frequency Trading: How It’s Changing the Market

Publication of Michael Lewis’ new book Flash Boys: A Wall Street Revolt about high-frequency trading is causing a global stir, gaining attention from the finance community, journalists, politicians, and the criminal justice world.  Many in the financial community are critical of the book and feel that it is too strongly biased against high-frequency trading. For example, many believe that the benefits of high-frequency trading are ignored by most pundits. This suggests a general lack of good information on the issue available to the general public. Fortunately, high-frequency trading is an issue that we follow at CFA Institute, and with the goal of providing relevant information in mind, here is a short, curated list of some of our content on the issue — an issue that we think is here to stay for years to come.

  • The Tractor Beam: Explains how high-frequency trading “mechanics” can have an impact on investment performance — even for investors who are not directly using high-frequency trading. (CFA Institute Magazine)
  • Beware the Alpha Sharks! High-Frequency Trading and Its Impact on Markets: High-frequency trading is now the norm, and it is not going away. So what can a low-frequency trader do? (Enterprising Investor)
  • “An Ugly High-Frequency Mess”: Distorted incentives can lead some high-frequency trading strategies astray. (CFA Institute Magazine)
  • Erroneous Combustion: The effects of high-frequency trading can make trading errors worse, more common, and more costly. (CFA Institute Magazine)
  • After Dark: Interview with Scott Patterson, author of Dark Pools: High-Speed Traders, A.I. Bandits, and the Threat to the Global Financial System. Patterson explains a “doomsday scenario” in which high-frequency trading and dark pools combine to cause massive flash crash across different asset classes and market sectors. (CFA Institute Magazine)
  • What to Do about High-Frequency Trading: High-frequency traders are engaged in a costly technology arms race that will not end well for investors if regulators do not act soon. (Financial Analysts Journal)
  • Poll: Are High-Frequency Trading Reforms Needed?: When we polled readers back in 2012, nearly two-thirds of respondents were in favor of tighter regulations. (Enterprising Investor)
  • The Well-Tempered Circuit Breaker: The new limit up/limit down “circuit breaker” system in question is meant to prevent flash crashes, a problem in which high-frequency trading has been implicated. (CFA Institute Magazine)
  • Tools vs. Ideologies: Yves Courtois, CFA, points out that because all financial models now appear suspect and high-frequency trading is based on the same unreliable models, the growing influence of high-frequency trading on markets could amplify systemic problems. (CFA Institute Magazine)

 


Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

Photo credit: ©iStockphoto.com/jazle

About the Author(s)
Jason Voss, CFA

Jason Voss, CFA, tirelessly focuses on improving the ability of investors to better serve end clients. He is the author of the Foreword Reviews Business Book of the Year Finalist, The Intuitive Investor. Previously, Jason was a portfolio manager at Davis Selected Advisers, L.P., where he co-managed the Davis Appreciation and Income Fund to noteworthy returns. He holds a BA in economics and an MBA in finance and accounting from the University of Colorado.

Ethics Statement

My statement of ethics is very simple, really: I treat others as I would like to be treated. In my opinion, all systems of ethics distill to this simple statement. If you believe I have deviated from this standard, I would love to hear from you: jason@jasonapollovoss.com

4 thoughts on “High-Frequency Trading: How It’s Changing the Market”

  1. James Jones, CFA says:

    Thanks for posting this listing. I read the Flash Boys yesterday and this provided some additional insight.

  2. Hi James,

    That’s so nice to hear, thank you for taking the time to communicate your appreciation. I have not read Flash Boys so would be curious to hear your thoughts about it.

    With smiles!

    Jason

  3. Tom says:

    Great resources Jason – thank you. Was fortunate two weeks ago to hear two talks in same day, previously unrelated but now connected for me, thanks to your top link: first talk by Barbara Mack at UMass Isenberg Finance lecture with material from HFT book (publication next month); later that evening attended talk by Williams College physicist on tractor beams and levitation (“wingardium leviosa”). Now it all makes sense!

    Mack book: http://www.amazon.com/High-Frequency-Trading-Regulation-Scientific/dp/9814520187/ref=sr_1_1?s=books&ie=UTF8&qid=1396538065&sr=1-1&keywords=Barbara+Mack+high+frequency+trading

    Appreciate the materials.

    1. Hi Tom,

      Yea! I’m pleased that the piece was useful to you. Here I must take the opportunity to share the love with my colleagues, Jennifer Curry, The Enterprising Investor’s editor, and Roger Mitchell, Editor of CFA Magazine, who also contributed to the creation of the above post.

      Thank you for your link, I will take a look!

      Jason

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