The document discusses high-frequency trading (HFT) and whether it is part of the solution or problem for efficient capital markets. It notes both potential benefits of HFT, such as higher liquidity and lower volatility, and potential issues, such as front-running and flash crashes. The document concludes that while technological development from HFT is required for global trading, it could be part of the problem if left unregulated due to risks from excessive and uninformative message traffic, overly complex market microstructures, untested trading algorithms, and interdependencies between algorithms.

1. HFT Luncheon @ Nasdaq OMX Helsinki:
EFFICIENT CAPITAL MARKETS
Is HFT Part of the Solution
or the Problem?
Tommi A. Vuorenmaa, PhD
«tommiavuorenmaa@triangleintelligence.com»
May 22, 2014

4. SPEED
LOGIC
TECH
DATA
CHARACTERISTICS OF HIGH‐FREQUENCY TRADING
Tommi A. Vuorenmaa 2014

5. ”THE GOOD”

6. ”THE GOOD” OF HIGH‐FREQUENCY TRADING
DATA PREDICTIVE
REACTION
LOGIC ACCURATE
REACTION
SPEED FAST
REACTION
HIGHER
LIQUIDITY
+
LOWER
VOLATILITY
+
EXTREME
EFFICIENCY
Tommi A. Vuorenmaa 2014

7. ”THE UGLY”

8. ”THE UGLY” OF HIGH‐FREQUENCY TRADING
DATA SEE INTO
FUTURE?
LOGIC KNOW THE
RULES
SPEED TAKE
ADVANTAGE
FRONT‐
RUNNING
+
FLASH
CRASHES
+
UNFAIR
MARKETS
Tommi A. Vuorenmaa 2014

9. Tommi A. Vuorenmaa 2014

10. ALGO
SELLS
PRICES
FALL
HFT ”HOT‐
POTATO”
VOLUMES
INCREASE
Tommi A. Vuorenmaa 2014

11. Tommi A. Vuorenmaa 2014

13. POLICY ADVICE

19. PART OF A SOLUTION OR A PROBLEM?
HFT IS PART OF THE SOLUTION
• Technological development
required to trade globally
• Liquidity, volatility, and
market efficiency improved
• Demand for multiple
trading venues persists
• Trading costs (e.g. spreads)
need to be at minimal levels
HFT IS PART OF THE PROBLEM
• Too much (uninformative)
message traffic if HFT left
unregulated/unsupervised
• Market microstructure (e.g.
order types) too complex
• Untested trading algorithms
• Complex interdependencies
between trading algorithms
Tommi A. Vuorenmaa 2014