One might expect that the impact of high-speed, computerized securities trading would not be a controversial subject because the relevant information can be quantified, measured, and assessed.
But one would be wrong.
When it comes to the impact of high-frequency trading (HFT) on securities markets, limited data and inconsistent measures of its impact only fuel a controversy in which there seems to be little ground between those who seem to know that HFT has ruined markets and those believing that investors have never had it better.
Adding to the controversy about the impact of HFT is today's publication of Flash Boys: A Wall Street Revolt by famed author Michael Lewis. While the book no doubt does a great job of explaining the complexities of modern financial markets to non-experts, based on excerpts, reviews, and interviews describing the stock market as being "rigged," those wanting a more nuanced view should look elsewhere.
To cut through the noise surrounding HFT, it's helpful to look at empirical studies on the subject.
And indeed, there's lots of empirical studies finding that HFT in various forms undermines the quality of markets and increases costs to investors. Perhaps the best review of evidence-based studies in this regard is a December 2013 publication by R. T. Leuchtkafer. It reviews numerous academic, industry, and government studies with conclusions such as "HFT can be highly destabilizing as it propagates shocks across markets at very high speed," "high frequency traders do not as a rule engage in the provision of liquidity like traditional market makers," and there is "strong evidence that HFT increases the trading costs of institutional investors."
But the usefulness of Leuchtkafer's review is limited: it only includes negative findings (and opinions, for that matter).
In March 2014, staff of the U.S Securities and Exchange Commission (SEC) conducted its own review of empirical studies on the impact of HFT. While certainly not comprehensive, the SEC's review includes several studies not included in Leuchtkafer's review. And many of these additional studies find that HFT has a positive impact on markets and investors.
Among other things, these studies found that HFT "was associated with a 15% decline in effective spreads and a 23% reduction in the adverse selection costs of posted prices," that "price efficiency as measured by [order imbalance and price delay] is significantly higher on days of high HFT aggressiveness," and that for investors "trading costs did not change significantly" following a fee change that reduced HFT.
The SEC's review is hardly an endorsement of HFT. Overall, it finds the impact mixed. In any case, the SEC's review recognizes its own limitations, noting that the HFT "picture remains unfinished" due to the limited availability of data.
So while empirical studies of HFT"s impact hardly paint a conclusive picture, they do help to cut through the noise of HFT's most vocal critics and proponents. Hopefully, a balanced view of the empirical record will have the most influence over any reforms undertaken by regulators or market participants.