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High-Frequency Trading: Background, Concerns, and Regulatory Developments

CRS - High-Frequency Trading: Background, Concerns, and Regulatory Developments. Gary Shorter, Specialist in Financial Economics; Rena S. Miller, Specialist in Financial Economics. June 19, 2014.

“On May 6, 2010, the Dow Jones Industrial Average (DJIA), a broad stock index, fell by nearly 1,000 points over the course of several minutes and then quickly rebounded. This was one of the largest intraday declines in the history of the DJIA and was described by one commentator as “one of those eye-opening events that exposed many flaws in the structure of the market.” Dubbed the Flash Crash, the event led to several analytical studies and reports and to greater scrutiny of a broad trading protocol known as high-frequency trading (HFT), a form of algorithmic securities trading, which has no formal consensus definition. In addition to the heightened scrutiny it received after the Flash Crash, HFT, which accounts for a large share of total domestic securities trades, has raised other public policy concerns. Among them are (1) whether it plays a role in exacerbating market fragility; (2) whether it may heighten the market’s systemic risk; (3) whether it enhances or harms the quality of those markets; (4) whether certain kinds of HFT may constitute an illegal form of front-running; (5) whether HFT helps foster a system of two-tiered trading markets that benefits certain traders at the expense of others due to their access to faster trading data and advantageous trade infrastructure; and (6) whether the presence of HFT has been to the detriment of non-HFT investors and investor confidence in the securities markets. As in earlier major market disruptions, such as the October 1987 market crash (when the DJIA lost almost 22% in a single day, setting off a global stock market decline), congressional interest in the Flash Crash derives in part from its decades-old legislative mandate that, among other things, delegated to the SEC responsibility for investor protection (through a regime of mandatory disclosure) and maintaining fair and orderly markets.”

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