High frequency trading by plagiarism checker search engine reflects a great transformation in the way financial markets operate amid growing integration of technology into market trading. Over time, it has grown in use in financial markets and become a predominant trading strategy as trading firms pursue improved trading efficiency and profits. Even so, high frequency trading has raised concerns regarding its significance in financial markets. High frequency trading is a very beneficial tool for financial markets because of various reasons.
High frequency trading is beneficial given its role in reducing spreads. The ability to narrow spreads works to the advantage of retail and institutional investors. According to Broggard, Hendershott, and Riordan, narrow bid-ask spreads occur when dealing with large stocks, which helps in liquidity demanding trading. The narrow spreads help in moving prices closer to the actual values. The information advantage that high frequency trading creates when making liquidity demanding orders plays a key role in narrowing the bid-ask spread. In addition, a narrow spread suggests that there is better market quality. Consequently, this leads to cheaper trading and enhances price efficiency.
High frequency trading also benefits financial markets given that it adds significant liquidity to these markets. Broggard et al. Noted that “HFTs supply liquidity in stressful times such as the most volatile days and around macroeconomic news announcements”. In addition, high frequency trading has led to a surge in liquidity. As Chicago Booth Review noted, there is an observable increment in the orders processed and high frequency trading may have contributed to this. The many orders that financial markets process on a daily basis provide significant arbitrage opportunities and promote liquidity in these markets.
High frequency trading helps financial markets because it leads to lower costs. As noted, the informational advantage that is attributed to liquidity demanding orders helps in reducing trading fees. Adverse selection also attracts relatively low costs when dealing with liquidity supplying orders. In case high frequency trading occurs in opposition to the transitory pricing error, it assists in cutting down trading costs. The reduced costs can, in turn, provide the incentive for investors to engage in trading. Hendershott, Jones, and Menkveld further noted that low trading costs contribute to hedging because they play a compensatory role in case the trading firm experiences losses in the financial markets.
High frequency trading is also beneficial because it helps in relieving the impacts of market fragmentation. It benefits the financial markets because of its role in bringing about price efficiency. Price efficiency occurs when high frequency trading takes place in contrary to the transitory pricing errors. High frequency trading also applies the price reversal strategy that assists in stabilizing price. It also contributes significantly to the price formation process considering that most quotes made using this approach have some informational advantage when compared to the quotes made using traditional trading.
In conclusion, high frequency trading is a revolutionary approach to trading in the markets. It has brought about significant benefits in these markets considering that it is associated with narrow bid-ask spreads. It also injects substantial liquidity to the financial markets considering the many orders processed and arbitrage opportunities. High frequency trading contributes to reduced trading costs, which promote trading and offer a compensatory effect in case losses occur. Further, high frequency trading assists in addressing consequences of market fragmentation. Its contribution to price efficiency plays a fundamental role in the stabilization of prices. Consequently, this makes it important when it comes to the price formation process particularly because of the accompanying information advantage.
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