MARKET EFFICIENCY AND STABILITY IN THE ERA OF HIGH-FREQUENCY TRADING: A COMPREHENSIVE REVIEW

Abstract

This comprehensive review analyzes the impact of high-frequency trading (HFT) on market efficiency and stability, synthesizing insights from 50 peer-reviewed articles, industry reports, and regulatory documents. High-frequency trading, which leverages sophisticated algorithms and high-speed data networks, has significantly transformed financial markets. The review confirms that HFT enhances market efficiency by providing liquidity and facilitating rapid price discovery, contributing to tighter bid-ask spreads and lower transaction costs. However, it also highlights several challenges, including market fragmentation, increased volatility, and potential for market manipulation. The review examines how HFT can exacerbate market instability and systemic risks, as demonstrated by incidents like the 2010 Flash Crash. It underscores the importance of robust risk management practices and regulatory measures to mitigate these risks and enhance market resilience. While current regulatory frameworks have had some success, continuous adaptation is necessary to keep pace with rapid technological advancements. Additionally, the review points to the potential of AI and machine learning in improving market surveillance and risk management. Ultimately, the findings suggest that a balanced approach to regulation and innovation is crucial to maximizing the benefits of HFT while ensuring market integrity and stability.