Algorithmic Trading and Challenges on Retail Investors in Emerging Markets

Abstract

Mixed views on automated trading in the extant literature lead to ongoing debates on algorithmic trading (AT) and high-frequency trading (HFT). This study elaborates on the rising ethical issues and regulatory challenges of algorithmic trading and high-frequency trading in emerging markets. While developed capital markets are dominated by institutional investors, emerging markets consist of a large proportion of retail investors who may suffer from aggravated liquidity asymmetry and stock price turbulence due to HFT and AT. Furthermore, we review current regulations of HFT in the U.S. and European markets and provide a framework of regulatory enforcements on AT and HFT for investor protection in emerging markets. This study cautions policymakers in emerging markets that legal and regulatory monitoring of AT and HFT activities is especially necessary.