“Exchanges risk making it harder for investors to get the best price by facilitating ever-faster trading, according to academics who examined Nasdaq OMX Group Inc. venues.
When Nasdaq sped up its markets in Copenhagen, Helsinki and Stockholm in 2010 by introducing its INET software platform, it spurred a race for profits among high-frequency traders, according to the report from VU University Amsterdam’s Albert Menkveld and his student, Marius Zoican. That competition reduced earnings. To compensate, the traders widened the spread between prices they were willing to pay to buy and sell shares, making it more expensive for most investors to trade stocks.
High-frequency traders using computers to automatically buy and sell have become the dominant market makers on exchanges around the world, supplanting human traders. Menkveld and Zoican’s paper says that when exchanges get faster, such as when Nasdaq reduced the reaction time of its Nordic markets to 250 microseconds from 2,500 microseconds in early 2010, they encourage not just helpful, liquidity providing high-speed traders, but also speculative ‘bandits’.”
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