A taxonomy of the 'dark side' of financial innovation: the cases of high frequency trading and exchange traded funds Online publication date: Thu, 31-Jul-2014
by Ivan Diaz-Rainey; Gbenga Ibikunle
International Journal of Entrepreneurship and Innovation Management (IJEIM), Vol. 16, No. 1/2, 2012
Abstract: This paper develops a taxonomy of the 'dark side' of financial innovation and applies it to two recent high-profile financial innovations; exchange traded funds (ETFs) and high frequency trading (HFT). The first half of the paper develops the taxonomy by categorising the negative effects of financial innovation as: 1) predatory schemes; 2) abuse of financial innovation; 3) unintended consequences of financial innovation. The second half of the paper applies the taxonomy to ETFs and HFT, thus allowing for a better understanding of the risks posed by ETFs and HFT. We explore these risks with examples and in the context of current efforts to reform financial regulation following the 2007-2008 'credit crunch'. In the latter case, we draw on a G20 survey that explored the capabilities of regulators to mitigate the negative effects of financial innovation.
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