- CFA Exams
- 2019 Level II > Study Session 17. Portfolio Management: Economic Analysis, Active Management, and Trading > Reading 51. Algorithmic Trading and High-Frequency Trading
- 4. Impact of Algorithmic and High-Frequency Trading on the Security Markets
Subject 4. Impact of Algorithmic and High-Frequency Trading on the Security Markets
The broad market impact of algorithmic trading is largely positive.
The positive impacts include:
- tighter bid-ask spreads,
- lower transaction costs,
- increases in liquidity, and
- improved pricing efficiency.
The primary concerns regarding HFT are:
- the potential for HFT to accentuate and accelerate market movements
- the risk posed by an out-of-control algorithm
- the ability of a trader to manipulate the market through spoofing or quote stuffing
- the increased complexity of regulatory oversight, and
- the impact of unequal access to information.
Practice Question 1The following are concerns regarding HFT. Which one contributed to the loss of Knight Capital?
A. Fear of an unfair advantage
B. Gaming the market
C. Algorithms gone wildCorrect Answer: C
In the case of Knight Capital, an algorithm went out of control and submitted unanticipated orders.
Study notes from a previous year's CFA exam:
f. describe issues and concerns related to the impact of algorithmic and high- frequency trading on securities markets.