Abstract:
The high-frequency trading (HFT) as an increasingly prominent form of securities trading nowadays, with the rise ofits various trading strategies, is not only due to the speed advantage brought by automated algorithms but also closely linked tothe specific market infrastructure provided by the law. According to the analysis based on the theory of market microstructure,HFT fundamentally affects the market liquidity supply and efficient price formation mechanisms, posing two significant regulatorychallenges. First, a large number of withdrawals by high-frequency traders due to abnormal market volatility could exacerbatemarket liquidity crises, potentially generating the risk of systemic market collapse. Second, the inherent flaws in their algorithmicmodels, coupled with the detrimental effect on the interest of professional and informed traders, could undermine long-termmarket price discovery and resource allocation efficiency. In response to the potential negative impacts of HFT on market quality,securities regulation needs to go beyond the traditional disclosure paradigm and focuses on responding at the level of securitiesmarket infrastructure. Specifically, regulators should adopt the transaction deceleration mechanism as an ex-post regulatorystrategy, establish market-making obligations for high-frequency traders along with the corresponding compensation schemes, andensure fair access to market data for investors.
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