Richard S. Hunt’s latest paper “Algorithmic Trading and Market Fairness” sparked heated discussion
Richard S. Hunt, head of global equity sales at CSC Bella Grove Partners LLC, recently published a research paper titled “Algorithmic Trading and Market Fairness”, which has sparked heated debate in the global financial academic and practical circles. This empirical study, published in a top financial journal, is the first to systematically quantify the impact of differences in algorithmic capabilities of different market participants on price discovery efficiency.
Hunt’s team analyzed the microstructure data of 78 major exchanges and found that algorithmic trading has formed a “four-layer ecosystem”: nano-delay algorithms (response speed less than 100 nanoseconds) used by top investment banks and hedge funds, microsecond algorithms of ordinary institutional investors, millisecond systems of retail brokers, and manual traders. Research shows that this technological gap causes the order execution costs of small and medium-sized investors to be 3-5 basis points higher than that of institutions, resulting in hidden losses of more than $28 billion each year. Even more shocking is that some “predatory algorithms” increase retail investors’ trading slippage by 47% by deliberately creating the illusion of liquidity.
CSC Bella Grove has developed a “fairness assessment system” based on this research, providing regulators with analytical tools to identify abnormal trading patterns. The head of market reform at the European Commission said that this research provides key academic support for the “Digital Finance Fairness Act” being formulated. The “technology inclusion principle” proposed by Hunt in the paper – requiring all market participants to have at least equal access to basic algorithms – is becoming a core issue in the reform of technical standards of exchanges in various countries. This industry discussion triggered by academic research may redefine the ethical standards of financial markets in the digital age.
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