Views on improving the integrity of global capital markets
20 November 2015

Live Twitter Chat 7 December (#CFAHFT): Market Liquidity, HFT, and Adverse Selection

Posted In: Market Structure

The debate over modern market structure has intensified in recent years, amid increased scrutiny of high-frequency trading (HFT) and the evolving role of technology in equity markets.

CFA Institute is contributing to the debate with a new study that examines the characteristics of liquidity in equity markets and the issue of “adverse selection“ (the risk that a limit order gets picked off by a more informed trader).

The report investigates two recurring investment practitioner complaints:

  • The perception that contemporary market structure has increased the “adverse selection” problem, whereby high-frequency traders (HFTs) divert their trading to dark venues during stable market conditions, before switching to lit markets just as prices begin to move. This often leaves investors using limit orders on lit venues on the wrong side of the market.
  • The view that displayed liquidity does not represent the true ability to execute trades. This may arise, for example, when HFTs post numerous duplicate limit orders to increase the probability of execution because they know they have a speed advantage that enables them to cancel the unnecessary duplicate orders before execution.

Live Twitter Chat with Report Author, Industry Insider

Join report author and CFA Institute capital markets policy analyst Sviatoslav Rosov, PhD, CFA, and Dennis Dick, CFA, proprietary trader and head of equity market structure at Bright Trading, for a live Twitter chat at 12 p.m. EST Monday, 7 December. The hashtag to follow along is #CFAHFT.

Among the topics Rosov (@SRosovCFA) and Dick (@TripleDTrader) will cover:

  • Who is hurt by “adverse selection”?
  • Is the adverse selection problem a specific feature of modern electronic markets? Or is it a bigger problem than prior to the advent of HFT?
  • Are electronic market makers more informed of imminent “quote rolls”? Over time, will this deter investors from trading on “lit” venues?
  • Which lessons can investment managers draw from the study about how and where to route orders?
  • Did HFTs contribute to the 2010 and more recent flash crash?
  • What implications does this research have for public policy?

Watch Rosov recap key research findings.

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About the Author(s)
Crystal Detamore

Crystal Detamore is a communications director at CFA Institute and a former columnist for Entrepreneur magazine.

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