I recently published an article in response to a study of high-frequency trading (“HFT”) by Professor Charles M. Jones of Columbia Business School and an opinion piece he published simultaneously in Politico. My article focused on the funding of the research by Citadel LLP, a major HFT user. It also pointed out broad concerns about the study, which asserts that computer-based algorithmic trading provides substantial net value to the economy.
Keeping in mind the Professor Jones’ funding source, it is useful to look into the studies on which the professor relies (his independent work was limited to interpretation). These should be compared with other academic work that draws alternative conclusions.
The studies that he cites as supportive are generally based on conventional views of the efficiency of markets. These studies identify lower trading costs that have been experienced during the years that HFT has emerged as a dominant force in the equities and commodities markets. He concludes that HFT provides liquidity (buying and selling interest) by generating large numbers of quotes to buy or to sell on which investors can rely for execution of desired trades, thereby reducing transaction costs.
Of course, exchanges and other trading venues have adopted innovations during the same period that also reduced transaction costs. And many institutional investors fled to “Dark Pools,” trading venues designed to allow them to hide from predatory HFT, suggesting that they did not value HFT very highly. But we will ignore these factors for now.