Brattle associate Pavitra Kumar, senior advisor Michael Goldstein, and principal Frank Graves have authored a newsletter on high-frequency trading (HFT), a trading mechanism in which quotes only last for a few micro- or milliseconds.
High-frequency trading has caught the attention of the financial industry and general public due in large part to a few extreme and dramatic price drops or spikes that have occurred over the last year, including the “Flash Crash” of May 2010. The newsletter discusses the evolution of HFT over the past decade and some of the key features of HFT strategies. It also evaluates the impacts that high-frequency trading has had on the markets, including issues such as the fairness of HFT practices, whether HFT improves market efficiency, how it affects market liquidity, and whether it has potentially adverse side effects such as increasing price volatility. The authors also examine the regulatory solutions that have been recommended by the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission in their February 2011 joint report, and address how the increased volume of HFT may create possible ramifications for securities litigation in the future, to the extent that it changes our understanding of market efficiency and other metrics that affect liability and damages estimation in lawsuits.