A taxonomy of the 'dark side' of financial innovation: the cases of high frequency trading and exchange traded funds

Diaz‐Rainey, Ivan; Ibikunle, Gbenga

doi:10.1504/ijeim.2012.050443

Cited by 24 publications

(12 citation statements)

References 48 publications

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“…For instance, ICT technologies have facilitated the spread of high frequency trading (HFT) to an ever increasing number of markets and geographies. HFT has not only increased the speed of trading but also altered the nature of markets, with HFTs often taking on the role of liquidity providers and as such becoming the ultimate market insiders (Diaz-Rainey and Ibikunle, 2012;Hendershott, et al, 2011). Furthermore, ICT technologies and deregulation have facilitated the development of maligned financial innovations (such as credit derivatives and securitized loan assets) and ones such as Exchange Traded Funds (ETFs) that offer considerable benefits but also sizable risks (Allen, 2012;Brunnermeier, 2009;Diaz-Rainey and Ibikunle, 2012).…”

Section: Capital Markets and Itmentioning

confidence: 99%

“…HFT has not only increased the speed of trading but also altered the nature of markets, with HFTs often taking on the role of liquidity providers and as such becoming the ultimate market insiders (Diaz-Rainey and Ibikunle, 2012;Hendershott, et al, 2011). Furthermore, ICT technologies and deregulation have facilitated the development of maligned financial innovations (such as credit derivatives and securitized loan assets) and ones such as Exchange Traded Funds (ETFs) that offer considerable benefits but also sizable risks (Allen, 2012;Brunnermeier, 2009;Diaz-Rainey and Ibikunle, 2012). The combination of ICTs and deregulation have also resulted in 'liquidity fragmentation' or 'market fragmentation' with the emergence of alternative trading venues and 'dark pools' that have resulted in the erosion of market share for traditional regulated exchanges.…”

Section: Capital Markets and Itmentioning

confidence: 99%

“…Following this event, some commentators suggest that about $232 billion was withdrawn from US equity mutual funds between May 2010 and January 2012, whether or not it was initiated by HFT is immaterial. What was evident from the incident was that markets had become heavily reliant on HFT and when they withdrew from the market liquidity evaporated causing dramatic falls in share prices (see Diaz-Rainey and Ibikunle, 2012;Easley et al, 2011). Moreover, though the 'flash crash' was not an "X-event" (see reference to…”

Section: High Frequency Trading and The 'Flash Crash'mentioning

confidence: 99%

“…Accordingly, it would seem critical that policy responses concerning HFT discern between those HFTs employing aggressive, and (perhaps) predatory practices, and passive HFTs that Hendershott et al, 2011;Hasbrouck and Saar, 2013). HFT can prove to be a potent force for improving market quality (see Harris, 2013;Diaz-Rainey and Ibikunle, 2012). For instance, Benos and Sagade (2012) show that HFT trades are on average more informationally efficient than non-HFTs.…”

Section: The Finance Literaturementioning

confidence: 99%

“…In the latter case, concerns about financialized commodity markets are an example of the expanded scope of finance. In this case it is clear that financial innovation (such as Exchange Traded Funds -ETFs) facilitated by ICT technologies have in turn enabled financialization by, for instance, allowing household investors the opportunity to invest in commodity markets (see Diaz-Rainey et al, 2011;Diaz-Rainey and Ibikunle, 2012;UNCTAD, 2011).…”

Section: Financialization and Other Social Critiquesmentioning

confidence: 99%

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The technological transformation of capital markets

Diaz‐Rainey

Ibikunle

Mention

2015

Technological Forecasting and Social Change

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Technology has dramatically altered capital markets over the past few decades. Technologically induced innovations such as electronic exchanges, high frequency trading (HFT) and exchange traded funds (ETFs) have made trading in capital markets faster, cheaper and more integrated, yet at the same time market liquidity has become more fragmented and opaque. Further, there are concerns that this new paradigm leads to greater volatility and myopia in the core function of finance (raising capital for entrepreneurial activity). Capital markets are clearly complex adaptive techno-social systems that are undergoing dramatic changes yet they are rarely researched from an innovation research or technological change perspective. In this editorial, we introduce the themes and issues highlighted by the papers in this Special Issue that addresses this gap in the literature. The contributions illuminate the technologies and related innovations that are changing the nature of capital markets. However, technology cannot be seen in isolation from other forces, most notably regulation, organisational innovation and new entrants. Moreover, technology is not only changing existing markets, it is expanding the scope of markets. Thus we conclude that that financialization (the process by which financial markets become increasingly important in the economy and society) is a technology enabled phenomenon-something hitherto largely overlooked by the financialization literature.

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