What Impact Does High-Frequency Trading Have on Market Volatility?

Question: There’s been a lot of research and gathering of evidence for and against high-frequency trading and its impact on current market volatility and the value it adds to things like liquidity, but I’ve never actually seen any sensible debate about this area of finance. What do the experts say?

Paul Solman: Well, the experts who are paid by the high-frequency traders say the practice adds to liquidity — i.e., ease of trading — and is thus a good thing. Other experts say it’s a waste of resources and adds more to volatility, and gives those with fancier algorithms and faster computers an unfair and economically useless edge.

Back in the ’80s, I came under the influence of Harvard economist Ben Friedman, who made the latter case in a story of ours some months ago.

I confess to remaining under Ben Friedman’s sway, though I acknowledge the plausibility of what another Friedman, the venerable Nobel libertarian MILTON (no relation) once said to me: “If you worked and learned your economics in Chicago rather than Boston, you’d have a very different view of the world.”

Maybe. But as with all counterfactuals, we’ll never know, will we?