Case Write-Up #1
HFT democratizes the market by allowing smaller trade volumes, more liquidity, and lower
transaction costs, making stock market investment accessible to the general public.
However, it may give big investors an unfair advantage by enabling them to access market
information before all investors and profiting from it.
Ray et al. (2007) highlight that resources like proximity to exchange servers and fiber optic
lines are key for HFTs (which ultimately give access to market information). These resources
enable them to access the exchange “order book” before it’s available on the SIP and
execute quick trades for a profit. This can lead to unfair advantages and may have
contributed to the 2010 flash crash, as HFTs account for 70% of US trading volume.
Nevertheless, Ray et al. also acknowledge that other factors, such as under-the-table deals,
can contribute to market imbalances besides HFT, and regulators should also focus on
those.
Total Words: 148