Having warned all the way since 2009 that HFTs not only accelerate but are ultimately responsible for flash crash events like the countless example seen in global capital markets, from US stocks in May 2010, to ETFs in August 2015, to the FX, most recently the sterling’s instaplunge last month, we were content to read that another prominent institution validated our concerns – which have been repeatedly ignored by the SEC which has been unfortunately captured by the HFT lobby – when the Bundesbank today released a report in which it warned that high-frequency trading firms “tend to aggravate financial-market swings and contribute to ‘flash crash’ events.”
‘In a calm market environment, HFT market participants contribute a significant amount of liquidity,’ the Bundesbank said. ‘However, during highly volatile market phases, the research shows that HFT market makers in both Bund and DAX futures markets temporarily reduce liquidity. HFT actors are especially active in times of strong market fluctuations and can therefore contribute to trend-enhancing price developments.”
‘Taken together, the different behaviors of active and passive high-frequency trading firms indicate a heightened risk of periods of short-term excessive volatility, which could encourage market upheavals as far as flash events,’ the Bundesbank wrote.
This post was published at Zero Hedge on Oct 24, 2016.
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