High Frequency Trading Review


    In light of the increased role of technology in the trading process in recent years, we survey the literature on the design of automated trading systems and the role of human intermediation. On the theoretical front, papers suggest that a pure electronic limit order book or a combination of dealer market elements and pure electronic limit order market elements dominates a pure dealer market. On the empirical front, papers suggest that there is not one type of market structure that is dominant in all circumstances. Generally, the evidence from equity, fixed income, and derivative markets suggests that fully automated markets could bene t from human intermediation. It should be noted that only a handful of academic papers consider recent developments like algorithm trading, high-frequency trading, and millisecond speed. The overall eff ect of the expanding role of computers in the trading process as it pertains to efficient markets, market quality, and social welfare is a matter of current debate among academicians, practitioners, and regulators, and is a question for future research.

    Cardella, Laura, Hao, Jia and Kalcheva, Ivalina, The Floor Trader vs. Automation: A Survey of Theory and Empirical Evidence (September 20, 2010). Available at SSRN: http://ssrn.com/abstract=1650345

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