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November 1, 2013

Braking HFT

By

Peter Chapman

Should one group of traders have a speed advantage over another? Many in the industry say 'no' as they blame high-frequency traders for the market's ills. At least one academic agrees and has a plan to put the brakes on.

Eric Budish, an associate professor of economics at the University of Chicago, told attendees at a recent industry conference that high-frequency trading drives up costs for investors by harming market makers. He believes a wholesale makeover of the market's structure from continuous trading to a series of call auctions would give bona fide liquidity providers time to react to the predatory behavior of high-frequency traders.

"A news event can lead to a race amongst high-frequency traders to pick off liquidity providers' stale quotes," he said at Baruch College's annual Financial Markets Conference. "That race manifests itself in an increased cost of liquidity provision. I think we have the wrong market rules in place. My research suggests we should move from a continuous-time market to one of discrete time. Perhaps once per second or once per 100 milliseconds."

 

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