Forensics Journal - Stevenson University 2012 | Page 23

FORENSICS JOURNAL

Brigagliano, J. A. (2009, October 28). Testimony Concerning Dark
Pools, Flash Orders, High Frequency Trading, and Other Market
Structure Issues. Testimony presented before the Senate Banking
Subcommittee on Securities, Insurance, and Investment. http://www.
sec.gov/news/testimony/2009/ts102809jab.htm

High Frequency Trading also presents disadvantages. HFT increases
short-term market volatility. Short-term volatility places additional
valuation risk primarily on short-term investors, such as day traders. It also makes comparison between market price and a company’s
fundamental value more important for long-term investors. Finally,
HFT brings an incredible volume of trading and quoting activity.
This activity places an execution strain on the various marketplaces
and a supervisory strain on regulators.

Brogaard, J. A. (2010). High Frequency Trading and Its Impact on
Market Quality (Doctoral dissertation, Northwestern University,
New York). Retrieved from https://fisher.osu.edu/blogs/efa2011/files/
MM_1_1.pdf.

Beyond the more easily quantifiable pressures HFT activity places
on the market, HFT also highlights other weaknesses in the current
market system. These weaknesses include transparency problems,
increased use of dark pools, fragmentation of the marketplaces, and
the lack of a singular consolidated tape system to report all orders
from all markets.

FINRA. “FINRA Hearing Panel Bars Broker for Manipulating Stock
Price Downward to Benefit Hedge Fund Client.” FINRA, 29 June
2010. Web. 5 Oct. 2011.
FINRA. “Financial Industry Regulatory Authority Letter of Acceptance, Waiver and Consent No. 20070076782-01.” FINRA, 14 July
2010. Web. 5 Oct. 2011.

Regulators have addressed some of these deficiencies. Implementation of the Single Stock Circuit Breaker and the elimination of stub
quotes will likely add some stability to the market and help avoid
crashes similar to the May 6th “flash crash” but these solutions do
not provide a complete failsafe. Additional analysis is required to
study how the circuit breaker rules will impact competition between
market makers and non-market maker High Frequency Traders.
Another dilemma is how to dissuade quote stuffing. This could