I am not on top of the relevant literature but wonder whether high frequency trading is partly responsible for the extraordinary volatility of global stock markets in recent times. In some cases firms are transmitting thousands of stock market orders per second. 2 out of 3 stock market trades in the US are of this form. The particular difficulty in markets like the Australian market where volumes are relatively low – and have been particularly low in recent times – is that such trading can drive prices.
I would be interested In views on this from those who are more knowledgeable on this subject. Recent trends seem strange to me and not adequately explained by oscillating views on the seriousness of the European situation and the strength of the US economy. There is a mixed empirical literature on the effects of high frequency trading on volatity – some suggests it reduces volatility. But I don’t know of literature that examines the same issue in a bear market where the possibility of a secular decline in prices would seem to create incentives for strategies to manipulate prices.