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The Mysterious Ethics of High-Frequency Trading

Author

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  • Cooper, Ricky
  • Davis, Michael
  • Van Vliet, Ben

Abstract

The ethics of high frequency trading are obscure, due in part to the complexity of the practice. This article contributes to the existing literature of ethics in financial markets by examining a recent trend in regulation in high frequency trading, the prohibition of deception. We argue that in the financial markets almost any regulation, other than the most basic, tends to create a moral hazard and increase information asymmetry. Since the market’s job is, at least in part, price discovery, we argue that simplicity of regulation and restraint in regulation are virtues to a greater extent than in other areas of finance. This article proposes criteria for determining which high-frequency trading strategies should be regulated.

Suggested Citation

  • Cooper, Ricky & Davis, Michael & Van Vliet, Ben, 2016. "The Mysterious Ethics of High-Frequency Trading," Business Ethics Quarterly, Cambridge University Press, vol. 26(1), pages 1-22, January.
    • Handle: RePEc:cup:buetqu:v:26:y:2016:i:01:p:1-22_00
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    Citations

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    Cited by:

    1. Kasim Khorasanee, 2024. "Spoof, Bluff, Go For It: A Defence of Spoofing," Journal of Business Ethics, Springer, vol. 189(1), pages 201-215, January.
    2. Carl David Mildenberger, 2023. "What (If Anything) is Wrong with High-Frequency Trading?," Journal of Business Ethics, Springer, vol. 186(2), pages 369-383, August.
    3. Andrea Roncella & Ignacio Ferrero, 2022. "The Ethics of Financial Market Making and Its Implications for High-Frequency Trading," Journal of Business Ethics, Springer, vol. 181(1), pages 139-151, November.
    4. Ramit Sawhney & Shivam Agarwal & Vivek Mittal & Paolo Rosso & Vikram Nanda & Sudheer Chava, 2022. "Cryptocurrency Bubble Detection: A New Stock Market Dataset, Financial Task & Hyperbolic Models," Papers 2206.06320, arXiv.org.
    5. Seddon, Jonathan J.J.M. & Currie, Wendy L., 2017. "A model for unpacking big data analytics in high-frequency trading," Journal of Business Research, Elsevier, vol. 70(C), pages 300-307.
    6. Ravi Kashyap, 2019. "Imitation in the Imitation Game," Papers 1911.06893, arXiv.org.
    7. Kun Li, 2018. "Do high-frequency fleeting orders exacerbate market illiquidity?," Electronic Commerce Research, Springer, vol. 18(2), pages 241-255, June.

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