Bad Regulation: High-Frequency Trading

Abstract

As we saw in Chapter 8, the global financial crisis ignited interest in the regulation of short selling on the grounds that it led, among other things, to market collapse and the bankruptcy of some companies. Since 2010, however, interest has shifted to high-frequency trading (HFT), with calls mounting to regulate this style of trading on several grounds, including some (such as the effect on volatility and liquidity) which are similar to those used to justify the regulation of short selling. The only difference (which is a fundamental difference) is that while we know exactly what short selling is, no one seems to know what HFT encompasses. A necessary condition for successful regulation is that regulators identify the target of regulation. It is claimed that some activities that are classified under HFT involve malpractices, some of which are dubious and others possibly illegal. It may be useful to state my position at the outset: if abusive and illegal practices are involved, these practices must be banned, but it makes no sense to condemn and punish traders who buy and sell more frequently than others, which is what HFT should be about.