It’s fast and furious, and controversial. High frequency trading is the computer–based buying and selling of shares within fractions of a milli-second. 60% of U.S. stock trades are carried out in this way, but it has been blamed for the so-called “flash crash.”
Nevertheless, a new study just out in Britain says this kind of trading is mainly beneficial. The study is the most comprehensive of its kind, drawing on 150 experts from 20 countries. The lead author, the British government’s chief scientific adviser Professor John Beddington, claims that high frequency trading is not as bad as it may seem: “There are definitely benefits in terms of liquidity and general efficiency of markets.”
That means quicker and cheaper share dealing for all. But critics point to the "flash crash": In May 2010, the Dow Jones Industrial average plunged almost ten percent and then bounced back within minutes. Beddington concedes that high frequency trading may have this effect, “There’s a real potential for feedbacks between computer programs to exacerbate fluctuations in trades,” he says.
Beddington’s report calls for closer surveillance and more research, but he rejects a plan by the European Parliament to force high frequency trading systems to slow down and take at least half a second to carry out a trade. The report says that would not be good for the market.