WHAT ARE THE EFFECTS OF HIGH-FREQUENCY TRADING ON MARKET VOLATILITY AND LIQUIDITY?

Abstract

The analysis focuses on the high-frequency trading (HFT), in which the stock trades are quickly carried out through the algorithms and computers, and it examines how HFT influences the volatility of stock prices and how easily stocks can be traded. It’s like trying to figure out whether these super-speedy traders are making the market better by making trade easier — or if they’re making things worse by simply making prices swing around in crazy ways.

We explored what existing studies have found, checked industry reports and scrutinized findings of other investigations. These results suggest that HFT faces a complicated problem. On one hand, however, it can make things easier for average investors by making stock buying and selling less expensive.

To this effect, our research has found that high frequency trading (HFT) is rewarding and risky as well. This is a positive base on the fact that it increases market liquidity through lowering the trading costs and enhancing market activity. However, in market turbulence, for instance, flash crashes, rapid trading can lead to bigger price fluctuations.

This study suggests that although HFT has significantly increased market efficiency in the modern era, it is impossible to overlook the risks it may provide in times of instability. Regulators must adopt policies that balance preserving HFT's advantages with reducing its detrimental consequences on market stability. Future studies are advised to fill up the gaps and investigate ways to overcome these difficulties.