The Effect of High Frequency Trading Systems on Financial Markets Essay

Whilst liquidity plays a central role in the functioning of pecuniary markets, it is volatility that can be truly detrimental. Despite almost world-wide agreement among faculty members that HFT improves prices for investors and dampens volatility in equity markets, since the 6th of May 2010 the domain has come under intense scrutiny from regulators. On a daylight described as the shoddy Crash, the U.S stock market experienced one of the most severe price drops in its history. In the takings of five minutes, the Dow Jones Industrial Index declined by 900 points, and then recouped the balk of those losses within the next 15 minutes. This unprecedented and unexplained volatility has laid-off public debate ever since.In the aftermath of the US Flash Crash, regulators were quick to pin blame on HFT. Within a week the chairman of the US Securities and Exchange Commission determined on that point was evidence that professional liquidity providers pulled out of the market when sha res started declining exacerbating the fall. mayhap irrationally, policymakers without any significant evidence believe HFTs pull out of markets at signs of stress, contributing to a sudden loss of liquidity and promoting volatility (Grant, 2011).Moreover, Andrew Haldane points to the flair crash whens he determines that the ever increasing speed of trading is amplifying volatility. In my opinion, in the aftermath of the financial crisis when regulators received so much criticism, I believe they feel they must act immediately, even if they dont know the true problem. I consider this evident from calls for increased HFT ruler from US Senator Charles Schumer, who bases his opinion on recent news reports (Zerohedge. 2010), rather than academic research or scientific re... ...ttp//blogs.wsj.com/marketbeat/2009/12/08/volcker-praises-the-atm-blasts-finance-execs-experts/. Last accessed 04/12/11.Jones, R. (2010). institutional Investor Flash Crash and CyberWar. Available http//hftsecuri tyrisk.com/category/flash-crash-specific/. Last accessed 04/12/11.Pagnotta, E & Philippon, T. (2010). The Welfare Effects of Financial Innovation High Frequency business in Equity Markets. Available https//editorialexpress.com/cgi-bin/conference/download.cgi?db_name=SED2011&paper_id=1246. Last accessed 04/12/11.Mackenzie, M & Demos, T. (2011). Fears linger of new flash crash. Available http//www.ft.com/cms/s/0/d18f3d28-7735-11e0-aed6-00144feabdc0.htmlaxzz1fPJAVyJm. Last accessed 04/12/11.Geithner, T. (2007). Liquidity and Financial Markets. Available http//www.newyorkfed.org/newsevents/speeches/2007/gei070228.html. Last accessed 05/12/11.