Question

Flash Boys: A Wall Street Revolt
“In Michael Lewis's game-changing bestseller, a small group of Wall Street iconoclasts realize that the U.S. stock market has been rigged for the benefit of insiders.”
Briefly Answer:
- What are the risks and benefits of high-frequency trading to investors?
- What are the risks and benefits of high-frequency trading to companies selling stock?
- What are the risks and benefits of high-frequency trading to investment and finance professionals?
- How do market structures influence each of these risks and benefits?

Solution Preview

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One of the key benefits of high-frequency trading to investors is that it improves market liquidity, thus attracting more investors into the market. High-frequency trading strategies play a market making role with the added advantage of reduced spreads. The second benefit of high-frequency trading to investors is its contribution to market efficiency by arbitraging away any discrepancies in price (Lewis, 2014). High-frequency traders break big trades hence reducing the effect of large buy or sell orders. Given that high-frequency trading transactions constitute the majority of trades in the market, the bid/ask spreads are reduced because both publicly available and publicly unavailable information is factored into the price...

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