“Spreads are small now because a lot of high-frequency trading is intermarket arbitrage — buying here and selling there. HFTs basically move liquidity from a market where it is more plentiful to a market where it is less plentiful. This is the good side of high-frequency trading. There is also a bad side. HFTs can use predatory algorithms, whereby their own actions can trigger a microstructure mechanism with a foreseeable outcome. Examples include quote stuffers, quote danglers, and pack hunters. Such activities are illegal but are hard to catch.” (OHara, 2014, “High-Frequency Trading and Its Impact on Markets” Financial Analysts Journal 70:3, May – June 2014
The opinion on dark pools and HFT is divided between proponents in favour of the apparent enhancement of liquidity and those who fear the predatory reputation which some participants have earned. Strong evidence in favour of HFT is summarised in OHara 2014, along with a practical summary of the issues faced by LFTs (low frequency traders). Hostility from the investing public, including LFT professional investors, has been fuelled by Lewis 2014.
1. Do you believe dark pools have provided a net cost or benefit to all market participants?
2. To what extent does HFT challenge active equity investment management?
3. What is the impact of HFT in dark pools on the end investor in listed companies, i.e. the individual investor?
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