The Ethics of High Frequency Trading

Abstract: High frequency trading (HFT) is currently under a cloud of controversy about its negative impact on financial markets. Questions arise over the fairness of the activity. Does HFT put longer-term investors at a disadvantage? This paper describes the most common HFT strategies and analyzes the ethics of HFT from a duty based and utilitarian standpoint, concluding that the ethics must be assessed according to each strategy.

High Frequency Trading (HFT) complicates the work of regulators. The agencies are not always armed with the best tools to identify and demonstrate price manipulation or market abuse. HFT enables the placement of millions of orders on securities like stocks, derivatives and currencies in just a few microseconds. Is HFT an ethical market activity? The question is important, because HFT now accounts for 70 percent of transactions in U.S. markets and 40 percent in European markets.[1] In HFT, a large number of orders are quickly placed, which can sometimes give a misleading picture of the order book and allow for manipulation. Fraud is difficult to detect, and the person behind it even more so.

What is HFT?

HFT is “the use of sophisticated technological tools and computer algorithms to trade securities on a rapid basis.”[2] HFT is characterized by algorithms running a large number of orders on computers without human interference. Many of these orders are almost immediately canceled (60 percent in…

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