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A taxonomy of the 'dark side' of financial innovation: the cases of high frequency trading and exchange traded funds

Author

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  • Ivan Diaz-Rainey
  • Gbenga Ibikunle

Abstract

This paper develops a taxonomy of the 'dark side' of financial innovation and applies it to two recent high-profile financial innovations; exchange traded funds (ETFs) and high frequency trading (HFT). The first half of the paper develops the taxonomy by categorising the negative effects of financial innovation as: 1) predatory schemes; 2) abuse of financial innovation; 3) unintended consequences of financial innovation. The second half of the paper applies the taxonomy to ETFs and HFT, thus allowing for a better understanding of the risks posed by ETFs and HFT. We explore these risks with examples and in the context of current efforts to reform financial regulation following the 2007-2008 'credit crunch'. In the latter case, we draw on a G20 survey that explored the capabilities of regulators to mitigate the negative effects of financial innovation.

Suggested Citation

  • Ivan Diaz-Rainey & Gbenga Ibikunle, 2012. "A taxonomy of the 'dark side' of financial innovation: the cases of high frequency trading and exchange traded funds," International Journal of Entrepreneurship and Innovation Management, Inderscience Enterprises Ltd, vol. 16(1/2), pages 51-72.
    • Handle: RePEc:ids:ijeima:v:16:y:2012:i:1/2:p:51-72
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    Citations

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    Cited by:

    1. Marszk, Adam & Lechman, Ewa, 2019. "New technologies and diffusion of innovative financial products: Evidence on exchange-traded funds in selected emerging and developed economies," Journal of Macroeconomics, Elsevier, vol. 62(C).
    2. Tamer Khraisha & Keren Arthur, 2018. "Can we have a general theory of financial innovation processes? A conceptual review," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 4(1), pages 1-27, December.
    3. Kauffman, Robert J. & Liu, Jun & Ma, Dan, 2015. "Innovations in financial IS and technology ecosystems: High-frequency trading in the equity market," Technological Forecasting and Social Change, Elsevier, vol. 99(C), pages 339-354.
    4. Ivan Diaz-Rainey & John Ashton & Maz Yap & Murat Genc & Rosalind Whiting, 2015. "The determinants of regulatory responses to risks from financial innovation: Survey evidence from G20," Working Papers 15001, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    5. Adam Marszk, 2016. "Impact of Innovative Financial Products on Financial Systems: Exchange Traded Products and the Polish Financial System," International Economics, University of Lodz, Faculty of Economics and Sociology, issue 14, pages 114-132, June.
    6. Ewa Lechman & Adam Marszk, 2014. "Reshaping financial systems. New technologies and financial innovations - evidence from the United States, Mexico and Brazil," GUT FME Working Paper Series A 20, Faculty of Management and Economics, Gdansk University of Technology.
    7. Lechman, Ewa & Marszk, Adam, 2015. "ICT technologies and financial innovations: The case of exchange traded funds in Brazil, Japan, Mexico, South Korea and the United States," Technological Forecasting and Social Change, Elsevier, vol. 99(C), pages 355-376.
    8. Tolendi Ashimbayev* & Sarkyt Tashenova & Yevgeniy Sadvakassov & Alma Karshalova, 2018. "Trends in Developing Financial Innovations in the Course of the Economic Development in Russia," The Journal of Social Sciences Research, Academic Research Publishing Group, pages 44-51:3.

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