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posted on 20 September 2015

High Frequency Trading - A New Approach To Stock Market Execution

from the Chicago Fed

-- this post authored by Rebecca Lewis and John McPartland

The Federal Reserve Bank of Chicago has published extensively on the risks and effects of high-frequency trading (HFT) in U.S. financial markets and has in the past expressed an interest in the concept of batch auctions as a potential way to diminish the speed advantage of HFT traders. The Chicago Stock Exchange (CHX) recently filed an application with the U.S. Securities and Exchange Commission (SEC) to inaugurate CHX SNAP, an on-demand batch auction service. If and when approved, SNAP auctions would deemphasize speed and allow institutional traders to place large orders, with a reduced risk that information leakage results in adverse price movements against them.

The proposed introduction of CHX SNAP is a response to changes in market technology that have provided an increasing advantage to the fastest market participants and led to the rise of HFT firms that often exploit their speed advantage to trade ahead of large orders placed by institutional traders. This has a tendency to make institutional traders more reluctant to display large orders to the marketplace, thus reducing liquidity. In this Chicago Fed Letter, we discuss the purpose and operation of SNAP auctions in the high-frequency trading environment.

Some have argued that HFT is often not about market fundamentals, but "a game against order books and the market rules."

HFT firms are market participants that have invested heavily in technology and algorithms that allow them to trade at high speeds and in large volumes. They typically make many small trades in a day and hold limited, if any, positions overnight.

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Source: http://app.frbcommunications.org/e/er?s=1064&lid

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