COMPUTATIONAL SOCIAL SCIENCE SEMINAR – High-Frequency Trading Synchronizes Prices in Financial Markets- Austin Gerig
COMPUTATIONAL SOCIAL SCIENCE FRIDAY SEMINAR
Austin Gerig, Financial Economist
Office of Markets
U.S. Securities and Exchange Commission
Friday, September 23, 2016, 3:00 p.m.
Center for Social Complexity Suite
3rd Floor, Research Hall
High-Frequency Trading Synchronizes Prices in Financial Markets
High-speed computerized trading, often called “high-frequency trading” (HFT), has increased dramatically in financial markets over the last decade. In the US and Europe, it now accounts for nearly one-half of all trades. Although evidence suggests that HFT increases market efficiency, there are concerns it also adds to market instability, especially during times of stress. Here, I show that HFT synchronizes prices in financial markets, making the prices of related securities change contemporaneously. With a model, I demonstrate how price synchronization leads to efficiency gains: prices are more accurate and transaction costs are reduced. During times of stress, however, localized errors quickly propagate through the financial system if safeguards are not in place. This research highlights an important role that HFT plays in markets and helps answer several puzzling questions that previously seemed difficult to explain: why HFT is so prevalent, why HFT concentrates in certain securities and largely ignores others, and finally, how HFT can lower transaction costs yet still make profits.