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.
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.
HFT activity is positively correlated with execution shortfall.
When HFT activity is more intense, institutional investors’ execution shortfall is higher.
The increasing effect of HFT activity on execution shortfall is stronger on smaller stocks.
When HF traders on the net are buying (selling), it is more costly for institutional investors to sell (buy).
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, the U.S. is lagging. On the bright side, the SEC today launched a website dedicated to publishing data mined by its market-monitoring system MIDAS. 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.
Yarra Square Partners returned 19.5% net in 2020, outperforming its benchmark, the S&P 500, which returned 18.4% throughout the year. According to a copy of the firm's fourth-quarter and full-year letter to investors, which ValueWalk has been able to review, 2020 was a year of two halves for the investment manager. Q1 2021 hedge fund Read More