High-Frequency Trading Crackdown Would Hurt Market: Mercatus

Despite recent heightened criticism of high-frequency trading, “aggressive regulation” of HFT isn’t needed and there are several potential economic benefits of this trading strategy, according to a new analysis by the Mercatus Center, a market-oriented research group at George Mason University.

The study, An Analysis of Global HFT Regulation: Motivations, Market Failures and Alternative Outcomes, notes empirical evidence that shows that HFT reduces trading costs, provides better investment performance for long-term investors, and offers more flexibility and options for smaller retail investors. Conversely, the study argues that when countries limit HFT, they suffer diminished liquidity.

The study argues that there is “little evidence that a market failure exists requiring additional aggressive regulation of HFT, or that government intervention will achieve market integrity or ‘fairness’ goals better than existing market incentives.”

Many regulatory proposals also have “unclear definitions of HFT that fail to differentiate it from algorithmic trading and other technology-driven markets,” the study says. As a result, the authors of the report, Holly Bell and Harrison Searles, note that these proposals “could have unintended consequences for financial markets as a whole.”

What’s more, there are a number of existing regulations and cooperative nonregulatory solutions in place to ensure the integrity of financial markets where HFT is used, the authors say, including circuit breakers, HFT-neutralizing algorithms and erroneous order detection systems.

The authors warn that “aggressive HFT regulations in certain markets” could push financial activities and capital into growing and emerging HFT markets, such as those of Japan and Singapore. “Therefore, regulators should be careful to gather empirical evidence of a market failure before enacting new regulations targeting HFT.”