Breckenfelder, Johannes (2013): Competition among High-Frequency Traders, and Market Quality.
This is the latest version of this item.
PDF
MPRA_paper_93481.pdf Download (2MB) |
Abstract
We study empirically how competition among high-frequency traders (HFTs) affects their trading behavior and market quality. Our analysis exploits a unique dataset, which allows us to compare environments with and without high-frequency competition, and contains an exogenous event - a tick size reform - which we use to disentangle the effects of the rising share of high-frequency trading in the market from the effects of high-frequency competition. We find that when HFTs compete, their speculative trading increases. As a result, market liquidity deteriorates and short-term volatility rises. Our findings hold for a variety of market quality and high-frequency trading behavior measures.
Item Type: | MPRA Paper |
---|---|
Original Title: | Competition among High-Frequency Traders, and Market Quality |
Language: | English |
Keywords: | high-frequency trading, competition, high-frequency trading strategies, tick size reform |
Subjects: | G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages G - Financial Economics > G2 - Financial Institutions and Services > G23 - Non-bank Financial Institutions ; Financial Instruments ; Institutional Investors |
Item ID: | 93481 |
Depositing User: | Dr. Johannes Breckenfelder |
Date Deposited: | 24 Apr 2019 10:43 |
Last Modified: | 28 Sep 2019 08:03 |
References: | Ait-Sahalia, Y. and M. Saglam (2017). High frequency market making: Optimal quoting. SSRN eLibrary. Amihud, Y. (2002). Illiquidity and stock returns: Cross-section and time-series effects. Journal of Financial Markets, 31{56. Anderson, L., E. Andrews, B. Devani, M. Mueller, and A. Walton (2018). Speed segmentation on exchanges: competition for slow flow. Bank of Canada Working paper. Baron, M. D., J. Brogaard, B. Hagstromer, and A. A. Kirilenko (2018). Risk and return in high-frequency trading. Journal of Financial and Quantitative Analysis, forthcoming. Benos, E., J. Brugler, E. Hjalmarsson, and F. Zikes (2017). Interactions among high frequency traders. Journal of Financial and Quantitative Analysis 52(4), 1375-1402. Bertrand, M., E. Duo, and S. Mullainathan (2004). How much should we trust differences-in-differences estimates? The Quarterly Journal of Economics 119(1)(1), 249-275. Biais, B., T. Foucault, and S. Moinas (2015). Equilibrium fast trading. Journal of Financial Economics 116(2), 292-313. Boehmer, E., K. Y. L. Fong, and J. J. Wu (2015). International evidence on algorithmic trading. SSRN eLibrary. Boehmer, E., D. Li, and G. Saar (2018). The competitive landscape of high-frequency trading firms. Review of Financial Studies 31, 2227-2276. Bongaerts, D. and M. V. Achter (2016). High-frequency trading and market stability. SSRN eLibrary. Brogaard, J. and C. Garriott (2018). High-frequency trading competition. Journal of Financial and Quantitative Analysis, forthcoming. Brogaard, J., B. Hagstromer, L. L. Norden, and R. Riordan (2015). Trading fast and slow: Colocation and liquidity. Review of Financial Studies 28(12), 3407-3443. Brogaard, J., T. Hendershott, and R. Riordan (2014). High frequency trading and price discovery. Review of Financial Studies 27 (8), 2267-2306. Budish, E. B., P. Cramton, and J. J. Shim (2015). The high-frequency trading arms race: Frequent batch auctions as a market design response. Quarterly Journal of Economics 130 (4), 1547-1621. Carrion, A. (2013). Very fast money: High-frequency trading on the NASDAQ. Journal of Financial Markets 16(4), 680-711. Cespa, G. and X. Vives (2019). High frequency trading and fragility. Working Paper. Clark-Joseph, A. (2014). Exploratory trading. Working paper. Foucault, T., J. Hombert, and I. Rosu (2016). News trading and speed. Journal of Finance 71, 335-382. Foucault, T., R. Kozhan, and W. W. Tham (2017). Toxic arbitrage. Review of Financial Studies 30,1053-1094. Foucault, T. and A. J. Menkveld (2008). Competition for order flow and smart order routing systems. Journal of Finance 63, 119-158. Frino, A., V. Mollica, and S. Zhang (2015). The impact of tick size on high frequency trading: The case for splits. SSRN eLibrary. Hagstromer, B., L. Norden, and D. Zhang (2014). How aggressive are high-frequency traders? The Financial Review 49(2), 395-419. Hagstromer, B. and L. L. Norden (2013). The diversity of high frequency traders. Journal of Financial Markets 16(4), 741-770. Han, J., M. Khapko, and A. S. Kyle (2014). Liquidity with high-frequency market making. SSRN eLibrary. Hasbrouck, J. and G. Saar (2013). Low-latency trading. Journal of Financial Markets 14(4), 646-679. Hendershott, T., C. M. Jones, and A. J. Menkveld (2011). Does algorithmic trading improve liquidity? The Journal of Finance 66 (1), 1-33. Hendershott, T. and R. Riordan (2013). Algorithmic trading and the market for liquidity. Journal of Financial and Quantitative Analysis 48(4), 1001-1024. Hirschey, N. (2018). Do high-frequency traders anticipate buying and selling pressure? SSRN eLibrary. Hoffmann, P. (2014). A dynamic limit order market with fast and slow traders. Journal of Financial Economics 113(1), 156-169. Huh, Y. (2014). Machines vs. machines: High frequency trading and hard information. SSRN eLibrary. Jarnecic, E. and M. Snape (2014). The provision of liquidity by high-frequency participants. The Financial Review 49(2), 371-394. Jovanovic, B. and A. J. Menkveld (2016). Middlemen in limit-order markets. SSRN eLibrary. Kirilenko, A., A. Kyle, M. Samadi, and T. Tuzun (2017). The ash crash: The impact of high frequency trading on an electronic market. Journal of Finance 72, 967-998. Li, S. (2014). Imperfect competition, long lived private information, and the implications for the competition of high frequency trading. SSRN eLibrary. Meling, T. and B. A. Odegaard (2017). Tick size wars, high frequency trading, and market quality. SSRN eLibrary. Menkveld, A. and M. Zoican (2017). Need for speed? exchange latency and liquidity. Review of Financial Studies 30, 1188-1228. Menkveld, A. J. (2013). High-frequency trading and the new-market makers. Journal of Financial Markets 16(4), 712-740. O'Hara, M., G. Saar, and Z. Zhong (2015). Relative tick size and the trading environment. Working Paper. Pagnotta, E. and T. Philippon (2018). Competing on speed. Econometrica 86, 1067-1115. Rosu, I. (2019). Fast and slow informed trading. Journal of Financial Markets, forthcoming. SEC (2010). Concept release on equity market structure. concept release 34-61358, FileNo, 17 CFR Part 242 RIN 3235-AK47. Stoll, H. R. (2000). Friction (afa presidential address). Journal of Finance 55, 1479-1514. TMX (2015). TMX Group announces regulatory approval of TSX Alpha Exchange mode. TMX Newsroom. van Kervel, V. and A. J. Menkveld (2018). High-frequency trading around large institutional orders. Journal of Finance, forthcoming. Vayanos, D. and J. Wang (2012). Liquidity and asset returns under asymmetric information and imperfect competition. Review of Financial Studies 25 (5), 1339-1365. Yao, C. and M. Ye (2014). Tick size constraints, market structure, and liquidity. SSRN eLibrary. Yao, C. and M. Ye (2018). Why trading speed matters: A tale of queue rationing under price controls. The Review of Financial Studies 31, 2157-2183. |
URI: | https://mpra.ub.uni-muenchen.de/id/eprint/93481 |
Available Versions of this Item
-
Competition between high-frequency traders, and market quality. (deposited 17 Sep 2015 18:31)
- Competition among High-Frequency Traders, and Market Quality. (deposited 24 Apr 2019 10:43) [Currently Displayed]