High-frequency trading (HFT) has recently drawn massive public attention fuelled by theU.S. May 6, 2010 flash crash and the tremendous increases in trading volumes of HFTstrategies. Indisputably, HFT is an important factor in markets that are driven bysophisticated technology on all layers of the trading value chain. However, discussions onthis topic often lack sufficient and precise information. A remarkable gap between theresults of academic research on HFT and its perceived impact on markets in the public,media and regulatory discussions can be observed.The research at hand aims to provide up-to-date background information on HFT. Thisincludes definitions, drivers, strategies, academic research and current regulatorydiscussions. It analyzes HFT and thus contributes to the ongoing discussions by evaluatingcertain proposed regulatory measures, trying to offer new perspectives and deliver solutionproposals. Our main results are:
HFT is a technical means to implement established trading strategies.
HFT is not atrading strategy as such but applies the latest technological advances in market access,market data access and order routing to maximize the returns of established tradingstrategies. Therefore, the assessment and the regulatory discussion about HFT should focuson underlying strategies rather than on HFT as such.
HFT is a natural evolution of the securities markets instead of a completely newphenomenon.
There is a clear evolutionary process in the adoption of new technologiestriggered by competition, innovation and regulation. Like all other technologies, algorithmictrading (AT) and HFT enable sophisticated market participants to achieve legitimaterewards on their investments
especially in technology
and compensation for theirmarket, counterparty and operational risk exposures.
A lot of problems related to HFT are rooted in the U.S. market structure.
The flashcrash and the discussions on flash orders relate to the U.S. equity markets and the NMS. InEurope, where a more flexible best execution regime is implemented and a share-by-sharevolatility safeguard regime has been in place for two decades, no market quality problemsrelated to HFT have been documented so far. Therefore, a European approach to the subjectmatter is required and Europe should be cautious in addressing and fixing a problem thatexists in a different market structure thereby creating risks for market efficiency and marketquality.