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Policy Discussion Paper, Vol. PDP, No. 2013-01, May 2013
Recommendations for Equitable Allocation of Trades in High Frequency Trading Environments (REVISED July 2014)

Most industry observers and much of the academic research in this area have concluded that high frequency trading (HFT) is generally beneficial. Many institutional investors, however, argue that HFT places them at a competitive disadvantage. Digital computers will always have some structural (speed) advantages over human traders. This is inevitable.

This paper 1) acknowledges and summarizes much of the relevant published research, 2) discusses some of the HFT strategies that likely run counter to good public policy, and 3) makes nine recommendations that, if implemented, would likely restore the perception of fairness and balance to market participants that would be willing to expose their resting orders to market risk for more than fleeting milliseconds.

Readers should avoid the tendency to review this working paper only within the framework of their own nationality and market domain. The paper is meant to be global in scope. Some HFT practices that may be inappropriate (or banned) in some markets in some countries are alive and well in other markets in other countries.

Policy discussion papers are not edited, and all opinions and errors are the responsibility of the author(s). The views expressed do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.

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