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Study Finds that HFT Costs Institutional Investors

According to A Blessing or a Curse? The Impact of High Frequency Trading on Institutional Investors, trading costs for institutional investors increase as high-frequency traders increase market participation.  The author studied trades on NASDAQ in a selected sample of 120 stocks over a two year period and found that the complaints of institutional investors regarding front running may have some merit. The author estimates the increase in cost at $10,000 per day for the average institution with a one standard deviation increase in HFT participation. The author acknowledges other studies showing that high-frequency trading is associated with improvements in liquidity, volatility and efficiency, but argues that “HFT represents an ephemeral and expensive source of liquidity provision to institutional investors.”

High frequency trading and other market structure issues will be discussed at the Forum’s upcoming day-long conference, Best Execution in Today’s Complex Markets. The day-long event will discuss how high frequency trading and the current trading environment impact mutual funds and their shareholders and explore how these issues impact board oversight of best execution in both the equity and fixed income markets.