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Front‐Running Scalping Strategies and Market Manipulation: Why Does High‐Frequency Trading Need Stricter Regulation?
Author(s) -
Manahov* Viktor
Publication year - 2016
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/fire.12103
Subject(s) - high frequency trading , common value auction , trading strategy , quality (philosophy) , front (military) , business , order (exchange) , frame (networking) , algorithmic trading , computer science , industrial organization , economics , microeconomics , finance , engineering , telecommunications , mechanical engineering , philosophy , epistemology
Regulators continue to debate whether high‐frequency trading (HFT) is beneficial to market quality. Using Strongly Typed Genetic Programming (STGP) trading algorithm, we develop several artificial stock markets populated with HFT scalpers and strategic informed traders. We simulate real‐life trading in the millisecond time frame by applying STGP to real‐time and historical data from Apple, Exxon Mobil, and Google. We observe that HFT scalpers front‐run the order flow, resulting in damage to market quality and long‐term investors. To mitigate these negative implications, we propose batch auctions every 30 milliseconds of trading.