New research from the Capital Markets Co-operative Research Centre contradicts the theory that high frequency trading has a negative effect on global volatility levels.
Data from Professor Alex Frino of the University of Sydney Business School and Capital Markets Co-operative Research Centre instead suggests that HFT actually reduces, rather than increases, market volatility.
Frino worked with a range of international exchanges including NASDAQ and the London Stock Exchange to compile the data, which revealed no evidence of a link between price volatility and growing levels of high frequency trading.
On the contrary, Frino’s research showed that in many markets there was actually a negative rather than positive correlation between HFT and price volatility.
Speaking to The Wall Street Journal, Professor Frino said that HFT: “May actually play a role in decreasing excessive price volatility. Part of this function is the way algorithms identify trading opportunities - they're built to recognize when prices are abnormally high or low, and their response to this naturally pushes prices back towards equilibrium."
Frino also rejected accusations that the research was unreliable due to the involvement of organisations that profited from the volumes generated by high frequency trading. "Our partners are also regulators who make no money from trading volume, the Financial Services Authority (in the UK), the Securities and Futures Commission in Hong Kong hardly make money out of volume," he told CNBC.