IMF Assignment Essay

International Financial Market

Coursework Assignment: Explain high- frequency trading and evaluate its implications for the markets and stakeholders of equity markets.

Tutor’s name: Ian Sharpe

Student name: Chen Yang (Clarence)

Student number: 22039659

Word count: 2522

Introduction
This essay will be firstly given a short introduction and development of HFT. Then fully explanation on High-Frequency Trading (HFT) in various market will describe later. Lastly, people who are the winner or losers during the short-term and long-term will be expound after assessing the positive and negative implication of HFT on the equity market and various stakeholders.
History of Frequency trading
In 18th Century, Computer program trading system grows a vital part of Wall Street because both development of technology in last decades and changing in regulation drove the emergence of HFT. The Securities and Exchange Commission (SEC) brought trading system, which allowed electronic transaction platform to compete with the primary exchanges. In 1971, NASDAQ was the first electronic stock market which firstly applied quotation system for competing market makers to trade securities in the world. Approximately 2000, the exchanges began to quoting prices in cents generating some trading business model of market makers destroyed by spreads between bid and offer prices. After that, SEC's Regulation National Market System claimed that transactional orders can be posted nationally replace individual exchanges.
Consequently, the current markets what we familiar are fragmented, including both primary exchanges and secondary exchanges, for example New York Stock Exchanges and Better Alternative Trading Systems. HTF have developed these fragmented markets and operate stably, but many of literature revels the problems during the high frequency trading market.

Explaining High-frequency trading
Over the past decades, HFT has remarkably occupied a central position in the International financial market. High-frequency trading which always traded promptly by using super-computer system algorithms to sell or buy shares (Glen Arnold 2012). It is a part of algorithmic trading which can deal with massive volumes of information during the electronic platform and use that information to make decision.
Similarly, Go-molka (2011) defines HFT as the algorithmic trading process which encompasses short term and long term strategies as well as sells side and buys side market transactions. It could be said that high-frequency trading can be classifies as a form of automated trading, it use for decision making, order initiation and cancellation for several transaction without any human behaviour.
However, there are various characteristics of HFT during the development history. Aldridge's (2009) indicated that people can hold from milliseconds to one day. On the other hand, HFT can be represented as trading strategies, which holds seconds or milliseconds merely. HFT is definitely profit from the short term based on the initial price, which fluctuates every day.
In terms of the strategies of HFT, for example, low-latency trading which can be defined as strategies that react to market event in the millisecond environment by Hasbrouck and Saar (2013) and he emphasizes the low latency can get benefit from the environment by using algorithms. Human traders cannot recognize the market event at such speeds and complicated market may be driven by interaction between algorithms.
Moreover, further feature is that people who own professional skills or work for institution utilize specialized in proprietary trading base on the processing actual time data feeds and direct market access (Da-corogna et al.2001), they use dealing and arbitrage strategies drive markets liquidity
Base on the previous explanation on HFT, it plays a significant role of processing price information and affects the costs of transaction and liquidity in security trading.

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