High frequency trading may lower liquidity: Economist

Singapore

SUPPORTERS of the controversial "high frequency trading" (HFT) claim it enhances liquidity and efficiency in financial markets, but a new study suggests it may create inefficiencies that lead to lower liquidity.

The Economistsaid in a Nov 29 article, "Frequent but inefficient", that the study by Eric Burdish, Peter Crampton and John Shim shows that marketmakers who have to deal with HFT may actually take actions to insure themselves against loss, leading to wider bid-ask spreads and lower liquidity.