Competition among high-frequency traders, and market quality

Breckenfelder, Johannes (2013): Competition among high-frequency traders, and market quality. Published in: Journal of Economic Dynamics and Control , Vol. 166, No. 104922 (2024)

Abstract

I study empirically how competition among high-frequency traders (HFTs) affects their trading behavior and market quality. The analysis exploits a unique dataset, which allows comparing environments with and without high-frequency competition, and contains an exogenous event - a tick size reform - which I use to separate the effects of high-frequency trading competition from the effects of the rising share of high-frequency trading in the market. I find that when HFTs compete, their speculative trading increases. As a result, market liquidity deteriorates and short-term volatility rises. My findings hold for a variety of market quality and high-frequency trading behavior measures.

• Item Type: MPRA Paper
• Language: English
• Keywords: competition, high-frequency trading, tick size harmonization, FESE, changes in competition
• 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

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