Essay 1: HIGH FREQUENCY TRADING

FIN610 Financial Analysis and Ethics – Critical Thinking Essay 1

TASK

High Frequency Trading (HTF) can be defined as “the use of sophisticated computers and algorithms to flood an exchange with bid orders and cancellations in order to exploit short-lived trading opportunities” (Financial Review, 2014, vol. 49, no. 2). It is estimated that these transactions yield, on average, approximately 0.1 cents per share, which suggests the use of extraordinarily large intra-day trading volumes. Additionally, HFTs, close their positions by the end of the trading day. Therefore, HFT firms do not consume significant amounts of capital, and have a potential Sharpe ratio (a measure of reward to risk) tens of times higher than traditional buy-and-hold strategies.

Algorithmic and high-frequency traders were both found to have contributed to volatility in the Flash Crash of May 6, 2010, when high-frequency liquidity providers rapidly withdrew from the market. While some argue in favor of HFT over liquidity efficiency, several European countries have proposed curtailing or banning HFT due to concerns about volatility.

HFT has been an evolution of electronic trading starting in the early 1970’s with the creation of the NASDAQ. High Frequency Trading began to take shape as we know it in 1998 when Electronic Communications Networks (ECNs) allowed the trading of financial securities outside official exchanges. This prompted the SEC to increase regulation of Alternative Trading Systems.

Question 1: What is Spoofing, Layering and Tailgating/Front Running? (50 to 100 words excluding references, from the course or related)

Question 2: How do the above-mentioned practices relate to course materials to date? Briefly support your answer with Ethics intro business CFA eTHICS INTRO BOTH AREA ATTACHED