Research on high frequency trading shows rein-in would be detrimental

A three-year study with 120 US-listed companies has found that high frequency trading (HFT) can benefit investors, and that regulating this practice could be detrimental to securities markets. 

The University of Sydney Business School and the University of California, Los Angeles (UCLA) researchers estimated that up to 70 per cent of transactions by global electronic markets are now executed by computers. There has been pressure on regulators to put limits on HFT, saying it promotes disadvantage for normal investors by causing market volatility.

One specific HFT practice is to place an order then withdraw it, sometimes within a fraction of a second, to try to profit from tiny price shifts, with some saying this draws liquidity from the market. 

What we've discovered, however, is that these accusations are unfounded and equity markets would suffer if restrictions were applied to HFT traders who in fact supply liquidity.

Also discovered in the research was that the order cancellation ratio of HFT companies was the same as non-HFT companies, and on top of that, placement of orders and quick cancellation helped HFT effectively manage risk, and enhance market quality. 

See more on the research