High-Frequency Trading: Better Than its Reputation?

Author Name: 
Michael Chlistalla

• Over the past years, high-frequency trading has progressively gained a foothold in financial markets, enabled and driven by an interplay of legislative measures, increased competition between execution venues and significant advances in information technology.


• The terms “algorithmic trading” and “high-frequency trading” are frequently mixed up in the public debate. In contrast to traditional trading strategies, high-frequency traders do not aim to establish and hold long-term positions. Rather, they enter into short-term positions and end the trading day “flat”, i.e. without carrying over significant positions to the next business day. Algorithmic trading strategies, on the other hand, typically aim at reducing the adverse market impact of large-sized, institutional orders.

• Strategies employed by high-frequency traders are manifold: They may be differentiated into statistical arbitrage, liquidity detection and liquidity providing strategies (market-making).

• Extraordinarily high-speed and sophisticated quantitative and algorithmic computer programs for generating, routing, and executing orders are of paramount importance for the financial success of high-frequency traders.

• Existing evidence related to the impact of high-frequency trading on certain market quality and efficiency indicators is, as of now, inconclusive: while high-frequency traders provide liquidity to the market and contribute to the price formation process, some market participants feel themselves to be at a disadvantage by being unable to keep up with the necessary investments in trading technology.

• In light of the growing importance of high-frequency trading and its allegedly harmful effects in the event of adverse market conditions, regulators are currently putting strong emphasis on subjecting high-frequency trading to prudential and organisational requirements and to supervision by a competent authority.

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About Michael Chlistalla

Michael Chlistalla is a Senior Economist with Deutsche Bank Research in Frankfurt and Research Assistant at the Chair of e-Finance at the Faculty of Economics and Business Administration, University of Frankfurt. His research interests include institutions and infrastructures in financial markets, as well as market microstructural issues, with a particular focus on competition, order flow fragmentation, and market quality. He received a degree in Business and Computer Science from the University of Regensburg, with majors in Finance, IT-Security, and Banking IT.