On average, the research finds, high-frequency trading “leads to higher cost of capital” for companies.
The researchers note HFT reduces the cost of capital for the most liquid stocks by lowering the premium on liquidity. However, it raises the cost of capital for less-liquid, “low-beta” stocks by amplifying systemic risk.
For these less-liquid stocks, the correlated trading strategies used by high-frequency traders cause them to track the overall market more closely, resulting in markets that are more fragile and susceptible to events such as “flash crashes.” This increased systemic risk boosts the cost of capital.
Overall, this effect outweighs the benefit of HFT for highly liquid stocks, the research found.
“Our findings hold broad implications for practice, policymaking and regulation,” the paper says.
“Specifically, our results suggest that the benefits and costs of HFT are not uniformly distributed across stocks, providing potential justification for exploring stock characteristics-dependent access to fast trading infrastructure from a risk-based regulatory perspective,” it said.
“As HFT appears to reduce the cost of capital for the most liquid stocks while increasing it for low-beta stocks, a more nuanced approach to HFT regulation, one that considers stock characteristics, may be warranted,” it suggested.