The Flash Crash: The Impact of High-Frequency Trading on the Stability of Financial Market

Abstract

The growing prevalence of High-Frequency Trading (HFT) in financial markets has sparked intense debate over its impact on market stability. This paper aims to research the adverse effects that come along with HFT's enhancement of liquidity and price discovery efficiency. It contrasts the hardware infrastructure and execution speeds of high-frequency automated trading against manual trading and analyzes how the liquidity bubbles provided by HFT contribute to market volatility. This paper then concludes with three main points. First, HFT can pose a threat to market stability. Second, specific HFT strategies may mislead other market participants and lead to price distortions. Lastly, HFT may exacerbate market participation inequality, posing a market fairness challenge. Based on these findings, this paper recommends that regulatory authorities and policymakers pay closer attention to the potential risks of HFT and implement measures to maintain market stability and fairness.