Their results point to the importance of allowing for heteroskedasticity when testing for a
random walk in high-frequency financial data.
Chapter 5 examines economies of co-location in standard and low latency trading en-
vironments. Existing evidence shows that HFT strategies include the exploitation of
technical arbitrage opportunities. The authors discuss limitations to arbitrage opportu-
nities that rest on co-location (Hawk-Dove Game), and models strategic and spatial
consequences for money managers such as the technological and geographic segmenta-
tion of markets (von Th€unen).
Chapter 6 describes the regulatory evolution of HFT with a focus on the European
level. It illustrates differences between algorithmic trading and HFT and how the former
is a more comprehensive genus of the latter. It also outlines the main HFT strategies, in
particular with respect to the concept of liquidity. Finally the chapter takes into consid-
eration the HFT regulatory framework laid down in the recently passed European
Directive 2014/65/EU (the so-called “MiFID II”).
Chapter 7 shows how HFT has become more commonplace in the last few years,
more importantly, it has become more noticeable by the general investing public as
well as the policy makers. The growing use of HFT raises some important questions
and the author will address the following three: (1) provide an introduction to the nature
of HFT and its progression in terms of use in execution of financial investment order
flow, (2) implication of HFT for market efficiency specifically in relation to the “Efficient
Market Hypothesis” and (3) implications for ‘fairness’ in the financial markets.
Chapter 8 looks at Michael Lewis’ book Flash Boys which paints a highly unsympa-
thetic view of HFT. But while Lewis’ book has focused public attention on the phenom-
enon of HFT, he is far from the only critic. In this chapter, the author reviews some of the
more common criticisms in light of the extant empirical evidence. These criticisms are
mostly found to be lacking in substance. On the whole, HFT has improved market qual-
ity by reducing bid/ask spreads, enhancing immediacy, improving price discovery, and
making markets more resilient to unexpected shocks. Despite this, a relatively small suite
of pathological behaviors merit attention, such as front running, spoofing, and smoking.
Addressing these behaviors, however, must recognize that all possible market and regu-
latory structures have both costs and benefits. The job of the regulator, in essence, is to
choose which warts to live with, in order to achieve a satisfactory trade-off of these pluses
and minuses.
Chapter 9 explores the history and development of HFT to its current stance of
prominence in today’s financial markets. The authors review the major types of HFT
strategies in use, discuss their possible benefits and potential harms, and examine some
of the regulatory responses seen so far.
Chapter 10 examines the key regulatory issues associated with HFT in the Australian
equity markets. HFT has significant benefits but is not, however, free from perceived
drawbacks. One matter, in particular, predatory trading, has recently attracted regulatory
xxxiv Introduction