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Do HFT makes the financial market more efficient? In other words, do the security prices reflect...

Do HFT makes the financial market more efficient? In other words, do the security prices reflect their fundamental values better because of HFT? What are some of the concerns regarding the HFT?

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Answer #1

High frequency trading is a form of algorithmic trading where a automated trader interacts at lightning speed with trading platforms. HFT provides very high volume of transactions as they buy and sell multiple stocks aggressively than a typical investment bank. It provides rapid placement of orders, sometimes within seconds.Increased trading in HFT trading, increases market liquidity.

A well functioning market is more efficient as asset prices reflect the fundamental values. Yes security prices reflect the fundamental values better because of HFT.

The concerns are that the firms employing HFT, that firms engage in manipulative strategies , firms engage in front running by executing order ahead of their clients on the basis on non public information. It increases systematic risk in the market, as small shocks in the HFT orders has the potential to shock the entire market.

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