Bachelorarbeit, 2013
41 Seiten, Note: 1,00
The objective of this paper is to analyze the impact of High Frequency Trading (HFT) on capital markets, specifically examining why its effects cannot be fully explained by neoclassical economic theory. The paper will explore the controversial viewpoints surrounding HFT and its influence on market volatility.
1 Introduction: This chapter introduces the topic of High Frequency Trading (HFT), highlighting its rapid growth within increasingly electronic trading systems. It establishes the problem of HFT's seemingly contradictory effects: while theoretically enhancing market efficiency, empirical evidence suggests that it can exacerbate volatility, as seen in events like the Flash Crash. The chapter outlines the paper's aim to investigate this discrepancy through the lens of neoclassical economic theory and explore the need for regulation.
2 Fundamentals of HFT: This chapter delves into the core aspects of HFT, tracing its historical development from algorithmic trading and defining its key characteristics, including its speed and reliance on advanced technology (both software and hardware). It explores the diverse range of HFT users and the various strategies they employ, such as liquidity provision, liquidity detection, and different types of arbitrage. The chapter lays a crucial foundation for understanding the mechanisms and intricacies of HFT that will be analyzed in subsequent chapters.
3 The effect of HFT on capital markets and the Economic Neoclassical Theory: This chapter examines the impact of HFT on capital markets within the framework of neoclassical economic theory. It explores how the theory attempts to explain HFT's effects on liquidity, price discovery and volatility. The chapter likely contrasts the theoretical predictions with empirical observations, showcasing the limitations of the neoclassical model in fully accounting for the observed market phenomena related to HFT.
4 The regulation and supervision of HFT: This chapter focuses on the regulatory challenges posed by HFT, discussing the potential for market manipulation and the importance of effective supervision. It examines specific events, like the Flash Crash, to illustrate the need for regulatory intervention. The chapter likely discusses existing and proposed regulatory measures, such as circuit breakers, restrictions on certain order types, and broader policy options, analyzing their effectiveness in mitigating HFT's negative consequences and their impact on market volatility.
High Frequency Trading (HFT), Algorithmic Trading, Market Volatility, Neoclassical Economics, Market Regulation, Liquidity, Price Discovery, Flash Crash, Arbitrage, Regulatory Measures.
This paper comprehensively analyzes the impact of High-Frequency Trading (HFT) on capital markets. It specifically investigates why HFT's effects are not fully explained by neoclassical economic theory and explores the controversial viewpoints surrounding HFT's influence on market volatility.
The main objective is to analyze HFT's impact on capital markets, focusing on the discrepancies between its theoretical and empirical effects. The research will explore the limitations of neoclassical economic theory in explaining HFT, the role of regulation in mitigating negative impacts, various HFT strategies and their market effects, and the technology behind HFT.
The paper explores several key themes: the impact of HFT on market volatility; the limitations of neoclassical economic theory in explaining HFT; the role of regulation and supervision in mitigating negative impacts of HFT; different HFT strategies and their market effects; and the technological underpinnings of HFT.
Chapter 1 (Introduction): Introduces HFT, highlighting its rapid growth and seemingly contradictory effects (enhancing efficiency while potentially exacerbating volatility). It sets the aim to investigate this discrepancy using neoclassical economic theory and explores the need for regulation.
Chapter 2 (Fundamentals of HFT): Delves into HFT's core aspects, its history from algorithmic trading, key characteristics (speed, technology), user types, and strategies (liquidity provision, detection, arbitrage). It lays the foundation for understanding HFT's mechanisms.
Chapter 3 (HFT's Effect and Neoclassical Theory): Examines HFT's impact on capital markets through the lens of neoclassical economic theory, exploring its effects on liquidity, price discovery, and volatility. It likely contrasts theoretical predictions with empirical observations, highlighting the limitations of the neoclassical model.
Chapter 4 (Regulation and Supervision of HFT): Focuses on the regulatory challenges posed by HFT, including market manipulation and the importance of supervision. It examines events like the Flash Crash, discusses existing and proposed regulatory measures (circuit breakers, order type restrictions), and analyzes their effectiveness in mitigating negative consequences.
High-Frequency Trading (HFT), Algorithmic Trading, Market Volatility, Neoclassical Economics, Market Regulation, Liquidity, Price Discovery, Flash Crash, Arbitrage, Regulatory Measures.
The paper is structured with an introduction, followed by chapters detailing the fundamentals of HFT, its impact on capital markets within the framework of neoclassical economic theory, and the regulation and supervision of HFT. It concludes with a summary and key findings.
The paper discusses several HFT strategies, including liquidity provision (market making), liquidity detection, and various types of arbitrage (market neutral arbitrage, cross-asset, cross-market, and ETF arbitrage).
The paper explores existing and potential regulatory measures, such as circuit breakers, restrictions on unfiltered/naked sponsored access and flash orders, the Tobin tax, and short sale constraints. The impact of these measures on market volatility is also analyzed.
The paper critically examines the ability of neoclassical economic theory to explain the observed effects of HFT on capital markets, particularly regarding liquidity, price discovery, and volatility. It highlights discrepancies between theoretical predictions and empirical evidence.
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