Over the past decade, questions about high-frequency trading and its ethical implications have increasingly appeared in IELTS Writing Task 2 examinations. Based on analysis of recent test papers, this topic typically appears 2-3 times per year, particularly in academic modules. The growing relevance of automated trading in global financial markets makes this a highly probable topic for future tests.
High frequency traders analyzing real-time market data on multiple screens
Sample Question Analysis
Some people believe that high-frequency trading provides benefits to financial markets by increasing liquidity and efficiency. Others argue it creates unfair advantages and potential market instability. Discuss both views and give your opinion.
This question requires candidates to:
- Examine both positive and negative aspects of HFT
- Present balanced arguments supported by examples
- Provide a clear personal stance
- Demonstrate understanding of financial terminology
Band 8.5 Sample Essay
High-frequency trading (HFT) has revolutionized financial markets through automated algorithmic transactions executed in microseconds. While proponents highlight its market-enhancing capabilities, critics raise serious concerns about its fairness and risks. In my view, while HFT offers some benefits, its drawbacks outweigh these advantages and warrant stronger regulation.
The primary argument in favor of HFT centers on market efficiency. By rapidly executing large volumes of trades, HFT firms provide consistent liquidity that helps reduce bid-ask spreads and transaction costs for all market participants. Furthermore, their sophisticated algorithms can quickly identify and correct price discrepancies across different exchanges, leading to more accurate asset valuations. This price discovery function theoretically creates more stable and efficient markets.
However, several serious ethical concerns surround HFT practices. The most significant issue is the inherent unfairness created by speed advantages, where HFT firms invest millions in faster connections and closer server locations to gain microsecond advantages over regular investors. This technological arms race effectively creates a two-tiered market that disadvantages retail investors. Additionally, HFT algorithms can potentially amplify market volatility during stress periods, as witnessed during the 2010 Flash Crash where automated trading exacerbated price swings.
The social utility of HFT is also questionable. Unlike traditional investors who provide capital for business growth, HFT firms typically hold positions for mere seconds, adding little long-term value to the economy. Their focus on short-term price movements rather than fundamental analysis can distort market signals and discourage beneficial long-term investment.
In conclusion, while HFT may enhance certain aspects of market functioning, its negative impacts on fairness, stability, and economic value creation are concerning. Regulatory frameworks should be strengthened to ensure markets serve their fundamental purpose of efficient capital allocation rather than high-speed speculation.
Technical diagram showing high-frequency trading system architecture
Band 6.5 Sample Essay
High-frequency trading is a new way of trading in financial markets using computers. Some people think it is good while others say it has problems. I will discuss both sides and give my opinion.
On the positive side, HFT makes markets better. When computers trade very fast, it helps other people buy and sell stocks easily. The prices become better because computers can find mistakes quickly. Also, many people can trade more because the costs are lower.
However, there are some bad things about HFT. First, it is not fair because rich companies can buy fast computers and put them close to the stock exchange. This means they always trade faster than normal people. Second, sometimes the computers make mistakes and cause big problems in the market. This happened before and made many people lose money.
I think HFT is more bad than good. Even though it helps some trading, it makes the market unfair. Normal investors cannot compete with big companies that use HFT. Also, we don’t need trades to happen so fast. It’s better to focus on long-term investing.
To conclude, while HFT has some benefits, I believe its problems are bigger. The government should make rules to control HFT and protect normal investors.
Key Vocabulary
- High-frequency trading (n) /haɪ ˈfriːkwənsi ˈtreɪdɪŋ/ – automated trading using powerful computers
- Liquidity (n) /lɪˈkwɪdəti/ – ease of buying/selling assets
- Algorithmic (adj) /ˌælɡəˈrɪðmɪk/ – using mathematical rules
- Bid-ask spread (n) /bɪd æsk spred/ – difference between buying and selling prices
- Volatility (n) /ˌvɒləˈtɪləti/ – rapid price changes
- Price discovery (n) /praɪs dɪsˈkʌvəri/ – process of determining asset values
- Market stability (n) /ˈmɑːkɪt stəˈbɪləti/ – steady market conditions
- Flash crash (n) /flæʃ kræʃ/ – sudden market decline
Future Practice Topics
Consider practicing with these related topics:
- Cryptocurrency trading regulation
- Artificial intelligence in financial markets
- Traditional vs digital banking
- Financial technology ethics
Share your practice essays in the comments section for feedback and discussion with fellow IELTS candidates.
