High Frequency Trading

High Frequency Trading

1. Given the definition of a Financial System seen in Module 1, what elements of such a system do you see in the text? Financial Systems are comprised of instruments, financial intermediaries, financial markets and regulatory bodies. Financial instruments are securities or debts that generate a liability in the future. They are emitted by economic spending units and bought by other economic spending units. Their main function is to transfer funds and risk between economic agents. The text talks about High Frequency Trading in financial markets and we can state that HFT trades and exchanges with different financial instruments. The main instruments that we can identify in the text are shares and equities from the European Equity Market as well as the US Equity Market, for example the stocks of Procter & Gamble. Financial intermediaries are institutions that act as agents and issue financial instruments that allow savers to realize their savings and facilitate mobility of funds to finance borrowers. The text mentions the Bank of England, which has the role of a financial intermediary. A financial market is the place where the exchange of instruments takes its place. It does not have the necessity of being a physical place and contact can be made by phone of computer. The Dow Jones mentioned in the text when it explains that it plunged 1000 points before rebounding during the flash crash. The Dow Jones (e.g. Industrial Index) is an index of certain financial products traded at the New York Stock exchange. Another financial markets are also the dark pools. Regulatory bodies are institutions with the goal of supervising and regulation of financial activities. They are made to maintain the stability of the financial system as well as to protect the users of financial services. “The Foresight group” in the UK and the “European Securities and Markets Authorities” are examples of regulatory bodies that are mentioned in the text. They supervised the...