Ionut Florescu, Khaldoun Khashanah, Steve Yang – Monday, September 1, 2014

This white paper informs on the state of high frequency trading (HFT) mainly in the U.S. The paper addresses three major issues: First, it addresses HFT as it is seen from various market agents’ perspectives, traders, institutional investors, regulators, academicians, and the public, collectively referred to as stakeholders. The paper establishes a survey to get information on aspects of HFT. An examination of a HFT dataset verifies known trends and claims of HFT volume, price efficiency and liquidity. Second, the paper examines the imminent problems and risks seen by various stakeholders from their vantage point. An assessment of sources of risk posed by HFT to institutional investors and other components of the financial system reveals two types of risks to be examined more carefully: the first is HFT-driven systematic risk and the other is a potential HFT systemic risk. Third the paper examines possible solutions to existing issues of HFT along with recent claims. We find that there are two classes of claims of unfair practices facing HFT: one is the insider information through asymmetric access to information flows and the other is price manipulation claim. The paper introduces the concepts of information transmission distance and systemic latency. We propose a new solution based on information transmission zoning concept, which requires minimum financial information flow re-architecting and no major changes in regulation NMS.