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What (If Anything) is Wrong with High-Frequency Trading?

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  • Carl David Mildenberger

    (University of Zurich)

Abstract

This essay examines three potential arguments against high-frequency trading and offers a qualified critique of the practice. In concrete terms, it examines a variant of high-frequency trading that is all about speed—low-latency trading—in light of moral issues surrounding arbitrage, information asymmetries, and systemic risk. The essay focuses on low-latency trading and the role of speed because it also aims to show that the commonly made assumption that speed in financial markets is morally neutral is wrong. For instance, speed is a necessary condition for low-latency trading’s potential to cause harm in “flash crashes.” On the other hand, it also plays a crucial role in a Lockean defense against low-latency trading being wasteful developed in this essay. Finally, this essay discusses the implications of these findings for related high-frequency trading techniques like futures arbitrage or latency arbitrage—as well as for an argument as to why quote stuffing is wrong. Overall, the qualifications offered in this essay act as a counterbalance to overblown claims about trading at high speeds being wrong.

Suggested Citation

  • 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.
    • Handle: RePEc:kap:jbuset:v:186:y:2023:i:2:d:10.1007_s10551-022-05145-7
    DOI: 10.1007/s10551-022-05145-7
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    References listed on IDEAS

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    1. Jakob Moggia, 2021. "Moral Responsibility for Systemic Financial Risk," Journal of Business Ethics, Springer, vol. 169(3), pages 461-473, March.
    2. Pawan Jain & Steven J. Jordan, 2017. "Cancellation Latency: The Good, the Bad, and the Ugly," Financial Management, Financial Management Association International, vol. 46(2), pages 377-407, June.
    3. Peter-Jan Engelen & Luc Liedekerke, 2007. "The Ethics of Insider Trading Revisited," Journal of Business Ethics, Springer, vol. 74(4), pages 497-507, September.
    4. Robert Litzenberger & Jeff Castura & Richard Gorelick, 2012. "The Impacts of Automation and High Frequency Trading on Market Quality," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 59-98, October.
    5. Hillel Steiner, 2019. "Asymmetric information, libertarianism, and fraud," Review of Social Economy, Taylor & Francis Journals, vol. 77(2), pages 94-107, April.
    6. James Angel & Douglas McCabe, 2013. "Fairness in Financial Markets: The Case of High Frequency Trading," Journal of Business Ethics, Springer, vol. 112(4), pages 585-595, February.
    7. 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.
    Full references (including those not matched with items on IDEAS)

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