Academic Paper Asserts Benefits of High-Frequency Trading and Extreme Price Movements

A new academic study, "High-Frequency Trading and Extreme Price Movements" (the "Study"), argues that high-frequency traders ("HTFs") are net liquidity providers during extreme price movements and consequently perform a stabilizing function for markets. The Study examines data covering trading activity on NASDAQ from 2008 and 2009.

MoreWhile "some market observers claim that HFTs only supply liquidity in normal times and withdraw liquidity in times of stress," the Study's observations were the opposite: "normally, HFTs as a group demand more liquidity than they supply . . . and during price jumps HFTs supply more liquidity than they demand." Consequently, the Study's results "point to a positive role of HFT in stabilizing markets during periods of instability."

See: "High-Frequency Trading and Extreme Price Movements" by Jonathan Brogaard, University of Washington; Ryan Riordan, Queen's University; Andriy Shkilko, Wilfrid Laurier University; and Konstantin Sokolov, Wilfrid Laurier University.