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2018 U. Ill. J.L. Tech. & Pol'y 349 (2018)
Preserving Capital Markets Efficiency in the High-Frequency Trading Era

handle is hein.journals/jltp2018 and id is 361 raw text is: PRESERVING CAPITAL MARKETS EFFICIENCY IN THE HIGH-FREQUENCY TRADING ERA Gaia Balpt Giovanni Strampellitt Abstract Although HFT has become an important feature of financial markets internationally, its impact on the functioning of equity markets is still under discussion, as HFT can negatively affect market quality and stability. Regulatory measures recently adopted on both sides of the Atlantic to better control HFT-related risks chiefly focus on the stability, orderly functioning and integrity of markets, but give insufficient consideration to how HFT interacts with the allocative function of price discovery. In order to fill this gap, this article focuses on how HFT-related informational inequalities among investors threaten equity markets' (long-term) efficiency. Subscription to newswires and market data-feeds, along with co-location, grant HFTs early access to market- moving information that allows for latency arbitrage and trading ahead of other investors, which can discourage informed (slower) traders from carrying out costly fundamental analysis. Therefore, HFT challenges the theoretical framework underlying the Efficient Capital Markets Hypothesis, and can negatively affect price accuracy, real resource allocation and equity markets' allocative efficiency. Against this backdrop, this Article develops an analytical framework for possible regulatory strategies that seek to limit the negative effects of HFT on allocative market efficiency by reducing HFTs' speed advantage or by incentivizing fundamental informed traders to enter markets where they face costly pressures to compete with HFTs. Restricting the sale of trade data feeds or mandating speed bumps may discourage HFT and weaken its positive effects in terms of increased liquidity and better short-term price discovery, without however definitively curbing HFT-related risks concerning long-term price accuracy, while the replacement of the current continuous trading regime with a batched auctions-based regime would require major regulatory changes. The introduction of a continuous, event-driven, and faster issuer disclosure regime could limit these possible drawbacks by providing t Assistant Professor of Business Law, Bocconi University, Milan. tt Associate Professor of Business Law, Bocconi University, Milan. Although this Article is the result of the authors' joint work, Parts II and IV are attributable to Gaia Balp, while Parts Ill and V are attributable to Giovanni Strampelli; introduction and conclusion are attributable to both authors.

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