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The Impact of High-Frequency Trading on Market Liquidity

JANUARY 31, 2014

Presenter: A. Park, University of Toronto, Department of Economics Research (Podcast)
Stream: Risk Management and Market Liquidity (Stream 3)
Discussant: J. Christofilos, Vice President and Head Trader at AGF Investments

  1. Park discussed to what extent and how the least sophisticated traders in the market (namely, retail traders) are affected by high frequency trading. Since retail traders account for around 15% of daily trading volume in Canada and thus play an important role in capital formation, it is important to understand how these traders fare as markets become increasingly sophisticated. He showed that daily price movements have negative effect on retail profitability.
  2. Christofilos mentioned that HFT improve liquidity but the results in studies are based on quotes that are non-accessible to investors. Moreover, the costs involved in HFT are staggering (50% of all development costs). For example, TD Bank estimates that $50-$100mm will be spent to race with HFT.