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HFT in the zones - academic research

First Published 5th September 2014

Mitigate HFT market disruption by zoning traders, says research body.

New York - Academics are proposing to deal with high-frequency trading by setting up "information transmission zoning".

Traders located within the innermost zone - defined as the zone wherein the trader receives prices prior to the general market - would be considered market makers and therefore be required to obey Securities and Exchange Commission (SEC) market maker regulations.

Traders outside this zone could act as traders. Drawing this distinction would create a fair playing field with respect to the dissemination of price information without decreasing liquidity, the research shows.

Additionally, adopting this approach would require minimal financial information flow re-architecting, would build on the SEC's National Market System (NMS), and would not require any major change in regulation or regulatory authority, according to the authors. The report was commissioned by research group, the Investor Responsibility Research Center Institute (IRRCi).

"High-frequency trading is a highly disruptive technology that has turned upside down traditional relationships between physical distance, time and information flow. Before us now are complex issues of how to regulate this unchartered territory of micro-second trading and the inter-relationships between space, time, information flow, market structure and trading rules," says Khaldoun Khashanah, report lead author with the Stevens Institute of Technology Financial Engineering Division.

He added, "Understanding information transmission distance criteria and systemic latency leads to our concept of 'information transmission zoning' that can be applied in conjunction with the SEC's National Market System without the need for major, new regulations."

A practitioner summary of the research, High Frequency Trading: A White Paper and an Innovative Solution To Address Key Issues, is available here.

The full academic research study, On The Impact and Future of HFT: White Paper, is available here.