High Frequency Trading Review


    Abstract We analyze the impact of high frequency trading in financial markets based on a model with three types of traders: liquidity traders, market makers, and high frequency traders. Our four main findings are: i) The price impact of the liquidity trades is higher in the presence of the high frequency trader and is increasing with the size of the trade. In particular, we show that the high frequency trader reduces (increases) the prices that liquidity traders receive when selling (buying) their equity holdings. ii) Although market makers also lose revenue to the high frequency trader in every trade, they are compensated for these losses by a higher liquidity discount. iii) High frequency trading increases the volatility of prices. iv) The volume of trades doubles as the high frequency trader intermediates all trades between the liquidity traders and market makers. This additional volume is a consequence of trades which are carefully tailored for surplus extraction and are neither driven by fundamentals nor is it noise trading. In equilibrium, high frequency trading and traditional market making coexist as competition drives down the profits for new high frequency traders while the presence of high frequency traders does not drive out traditional market makers.

    Cartea, Álvaro and Penalva, José, Where is the Value in High Frequency Trading? (February 28, 2011). Available at SSRN: http://ssrn.com/abstract=1712765

    Visit resource

    Related content

    News: LSE share of HFT trading fell amid volatility, report says [Financial Times]
    7 October 2011 – High Frequency Trading Review
    A new research note by brokerage Instinet suggests that the volume of high-frequency trading on the London Stock Exchange declined relative to the overall market in …

    News: RBA’s Debelle Says High-Frequency Trades May Reduce Liquidity Amid Stress [Bloomberg]
    12 October 2011 – High Frequency Trading Review
    By Michael heath High-frequency trading, in which firms use computers to buy and sell thousands of times securities a second, may reduce liquidity amid market stress, Re…

    News: U.S., U.K. Regulators to Weigh High-Frequency Registration [Wall Street Journal]
    12 October 2011 – High Frequency Trading Review
    By Jacob Bunge Top market regulators of the U.S. and the U.K. this week will discuss the idea of formally registering high-speed electronic trading firms, the chairman of the…

    News: SEC May Monitor High-Frequency Trading With Consolidated Audit Trail [Huffington Post]
    11 October 2011 – High Frequency Trading Review
    By Bonnie Kavoussi Powerful computers scan dozens of markets and order millions of stock prices every second. These computers, situated in banks, hedge funds and trading firm…

    News: High Frequency Trades, Volcker Draft, Audits: Compliance [Bloomberg Businessweek]
    12 October 2011 – High Frequency Trading Review
    By Carla Main (Updates with Volcker Draft Special Section; margin rules in Compliance Policy; Central Bank of Italy in Comings and Goings.) Oct. 11 (Bloomberg) — Mary Schap…

    News: The race to zero: Asia [Datacenter Dynamics]
    12 October 2011 – High Frequency Trading Review
    By Ambrose McNevin Singapore SGX has commited US$250m to its low latency cause, as algo trading spurs investment in data center infrastructure around the world. SGX details i…

    News: High frequency traders: Saints or Sinners [Finextra]
    6 October 2011 – High Frequency Trading Review
    By David Holcombe   If you need to establish a one-size-fits-all stance on whether high frequency trading (HFT) is good or bad, don’t bother.  The recent …

    Leave A Reply