Columbia Holds Major Panel on Modern Financial Markets and High-Frequency Trading

The two-hour panel, “Modern Financial Markets: The Role of High-Frequency Trading,” was jointly organized by the Columbia Law School’s and Columbia Business School’s Program in the Law and Economics of Capital Markets, and by Columbia University Economics’ Program for Economic Research. Participants found it to be one of the most interesting and nuanced discussions of financial market structure and HFTs in recent times.

 

The trading behavior of HFTs is one of the more controversial and timely topics in equity markets today. Over the last thirty years, how stocks trade has been completely transformed. There are no longer dealers on NASDAQ or specialists at the NYSE. Stocks now trade on over fifty competing electronic venues, where computers match orders, and a majority of quotes are posted by HFTs.

Columbia Economics’ well-known economist Yeon-Koo Che introduced the event and topic, discussing the costly expenditures that HFTs engage in to obtain tiny speed advantages and the remarkable technological sophistication of today’s equity markets. Columbia Law School’s Merritt B. Fox, the Michael E. Patterson Professor of Law, NASDAQ Professor for Law and Economics of Capital Markets,then moderated presentations by the panelists. 

 

Lawrence Glosten of Columbia Business School introduced the mechanics of equity trading markets as well as the informational problems traders face in that market due to pervasive information asymmetries. Matt Trudeau, Head of Product at the alternative trading system IEX, then discussed various potential problems in the stock market and the solutions his trading venue had developed to respond to those problems. Terrence Hendershott of University of California Berkeley Haas School of Business then provided an insightful overview of how HFTs function in equity markets, how problems could develop, and what potential regulatory responses could be. Sophie Moinas of Toulouse School of Economics discussed some of her recent research analyzing different types of liquidity provision and how the ability to take positions could confer advantages on dealers over traditional brokers. Lastly, Adam Clark-Joseph of the University of Illinois discussed his research on exploratory trading – a trading pattern by which HFTs discern whether supply absorbs or is diminished by demand and then aggressively trade based on that information.

 

Fox then initiated a discussion among the panelists regarding various themes from their presentations, before moderating Q&A with the audience.

Although there was lively debate among the panelists, there was also significant common ground in agreeing that HFTs both serve a valuable social function by making markets as well as sometimes engage in informed and potentially undesirable trading behavior themselves. All agreed that HFTs play an important role in today’s equity market structure.

 

The Program in the Law and Economics of Capital Markets is run jointly by Columbia Law School and Columbia Business School to advance informed capital markets regulation as well as the efficient operation of the markets themselves. It is directed by the Law School’s Merritt Fox, the Michael E. Patterson Professor of Law and NASDAQ Professor for Law and Economics of Capital Markets; Lawrence R. Glosten, the S. Sloan Colt Professor of Banking and International Finance at Columbia Business School; and Edward F. Greene, senior counselor Cleary Gottlieb Steen & Hamilton LLP and a lecturer-in-law and senior research scholar at Columbia Law School. Yeon-Koo Che, the Kelvin J. Lancaster Professor of Economic Theory at Columbia University, is Executive Director of Program for Economic Research.