Article
Investors may take heart: A game theoretic view of high frequency trading
Journal of Financial Planning
(2016)
Abstract
High frequency trading (HFT) provides infrastructure for trading at speeds unimaginable only a decade ago. Using high speed infrastructure and special, but opaque, relationships with some exchanges, some high frequency traders are able to glean order flow information ahead of other traders and profit from it. The current arrangement is beneficial for HFTs and exchanges, but detrimental for investors. A relatively new stock exchange, IEX, has taken the lead in devising a system that denies preferential access to any trader (including HFTs) by providing an order routing system that eliminates the time lags between when an order reaches various exchanges. This is changing the incentive structure for stock exchanges and many may change their behavior in the future. In the meantime, to preserve the wealth of their clients, financial planners are advised to route large orders through IEX. Small orders need not be routed through IEX, but one must take the precaution of using limit orders at the quoted bid or ask price.
Keywords
- Game theory,
- Investment policy,
- Investors,
- Financial planners,
- Stock exchanges,
- High frequency trading,
- Studies
Disciplines
Publication Date
2016
Citation Information
C. Y. Wu and Vivek Pandey. "Investors may take heart: A game theoretic view of high frequency trading" Journal of Financial Planning Vol. 28 Iss. 5 (2016) p. 53 - 57 Available at: http://works.bepress.com/vivek-pandey/5/