High frequency tradingfacilitates thedissemination of price changeinformation,allowingeven privateinformation tobe reflected in prices well beforeit becomes news.
Efficient markets rely on the efficient dis-tribution of information. This informationresides both inside and outside the market.Within the market, information is containedand reflected in the price of securities. Onceoutside information is known to at least oneperson, it begins to be reflected in the price of a security or the market as a whole. Microeco-nomic information influences the value of a security relative to another security, whereasmacroeconomic information can influencethe market value as a whole. HFT helps dis-seminate this information within marketsquickly and efficiently.The movement and symmetry of internaland external market information are not as-sumed to be perfect. As Fama states, it is “
freely available.” One of the early notablecontributions to the field of market efficiency includes a paper published in 1921 by F. W.Taussig, in which he observed that financialmarkets seem to diverge from the ordinary reasoning of supply and demand as they aresubject to manipulation based on informationthat may not be widely known.
He observedthat technical information—such as whether a position is oversold or undersold—and insiderinformation and rumors all led to fluctuationsnot anticipated by supply and demand alone.In other words, information (and anticipatedinformation) influences market prices morequickly than traditional models of supply anddemand would forecast. This is in part due tothe fact that information cannot be suppliedto everyone at exactly the same time. Asym-metric information in informationally effi-cient markets is not a new concept.Price changes serve as an efficient way todisseminate information, even when everyonemay not immediately know the specific infor-mation. In this way even private informationbegins to be reflected in prices well before itbecomes news. Often by the time informa-tion is made public, price changes have al-ready been made. Paul Samuelson observedthat markets are so informationally efficientthat by the time an individual expects a priceto rise, it has already risen.
When the FederalReserve announces interest rate changes, forexample, the market has often already adjust-ed prices based on the anticipated news de-rived from other economic indicators. Fallingprices usually indicate negative informationand rising prices indicate positive informa-tion. Dimson and Mussavian provide a morecontemporary version of Fama’s definitionby describing market efficiency as “used todescribe a market in which relevant informa-tion is impounded into the price of financialassets.”
HFT helps facilitate this process.
The Changing Nature of Information in Efficient Markets
Financial market efficiency has been de-scribed in many ways, including “rational,”“a fair game,” “a random walk,” and “unbeat-able.”
However, one common element in allefficient market theories—including those thatclaim markets are inefficient—is the use andimpact of information on markets. The HFTdebate is no exception. The key characteristicthat differentiates HFT from other types of in-formation dissemination is the velocity of thatinformation. When much of the iconic litera-ture that guides our markets was written, in-formation moved relatively slowly, as a review of the history of the efficient market hypoth-esis reminds us. As a result, the analysis of therole of information was very static in natureand focused primarily on intrinsic microeco-nomic factors like dividends, price to equity ra-tios, corporate leadership structures, and riskmitigation through portfolio diversification.Since that time, the velocity of informa-tion—defined as the rate at which informationmoves through the market—has increased ex-ponentially. This has created a need for marketanalysis to be both faster and more dynamic.The development of HFT is both a result of,and a contributor to, this high-velocity infor-mation environment. The Internet, social me-dia, computerized trading platforms for ama-teur investors, the 24-hour availability of news,the global economy, and the fact that 401(k)