The high speed dark side.

The segment of High Frequency Trading is currently designated as the ultimate technology in systems investments, because of the ability to manage orders directly to book on a high speed.

There is much controversy regarding this technology, either for lack of structure and procedures of software development, causing risk of failure, or the misuse of some participants due to the price manipulation caused by these systems.

FCA, British authority, fined by the 1st time a case of market abuse caused by the misuse of high-frequency systems, due to an abusive practice that uses high speed to send and cancel a high volume of orders in the book, pressing prices artificially.

4 selected articles from “The Journal of Finance” – February 2013

The last edition of The Journal of Finance [link] came with good articles, related to financial engineering and capital markets that I would appreciate to list.

The Journal of Finance, one of the most prestigious finance journals, was established on 1946. Is one of the most cited journals with distinguished articles like “Portfolio Selection” [link] – Henry Markowitz.

The selected articles are:

Risk Management on High-Frequency Trading (HFT)

The tools to measure risk, VaR and Stress for example, can also be used for higher frequencies but should be considered the fact that they have a non-linear behavior more pronounced on intraday returns, requiring a more refined analysis.

The big issue I see is to understand the strategy used to then understand what the most appropriate methodology to present a risk to the decision maker.

The HFT universe expands the universe of data exploration, with respect to risk some phenomena must be considered, for example, effects of liquidity throughout the day.