Business Forum on Global Liquidity Risk Management:

Interview of Professor Tarun Chordia

Watch the Interview of Prof Chordia

Professor Tarun Chordia, of Emory University, was interviewed by Professor Fariborz Moshirian, the Institute of Global Finance’s Director. The interview centres on the concerns of global liquidity risk management. In particular, Professor Chordia addressed three key issues in relation to the subject.

Firstly, Professor Chordia began the interview by providing his working definition of ‘Liquidity’ which he believed was the ability to buy and sell a sufficient quantity of an asset without moving the price too much. Subsequently, he articulated certain methods of measuring different aspects of liquidity including trading volume, bidder spreads, reversal in daily trading and price impact measures.

Secondly, Professor Chordia discussed the reasons behind the importance of liquidity. The first key reason he cited was the impact of liquidity on asset prices. Specifically, he exemplifies that investors seeking to purchase illiquid stocks need to pay premium compared to liquid stocks. The second key importance of liquidity is its impact on market efficiency.

Thirdly, Professor Chordia presented his point of view, based on his research, regarding the costs and benefits of high frequency trading (“HFT”) and ultimately whether such activity should be regulated or not. Professor Chordia contends that market quality has improved as a consequence of HFT, signified through improvements in bidder spreads and intraday volatility. However, he submits that HFT can, in certain episodes, cause detrimental effects, as signified through HFT’s exacerbation of the flash crash. Despite this, Professor Chordia advocates that addressing these irregular occurrences will ultimately benefit market quality.

In addressing the question of whether HFT should be regulated, Professor Chordia highlighted two competing perspectives. Firstly, he contends that large institutions may be worse off due to HFT as a consequence of the increasing difficulty for them to execute large trade orders without paying a price premium. Secondly, however, from the individual investor’s standpoint, HFT is beneficial given the narrowing in bidder spreads associated with their activity. However, in aggregate, from an allocative efficiency standpoint, whilst HFT has improved liquidity and other market quality factors, it has not improved the efficient allocation of resources. As a result, Professor Chordia contends that it is difficult to reach a conclusive answer regarding whether HFT should be regulated or not. In saying this however, considering the current regulatory settings globally, he advocates that allowing competition between trading venues, in terms of regulation, has improved liquidity and reduced price impact. This subsequently benefits investors through providing them with venue optionality with which to make their specific trades.