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High-frequency trading and stock liquidity: An intraday analysis

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  • Ben Ammar, Imen
  • Hellara, Slaheddine
  • Ghadhab, Imen

Abstract

This paper studies the impact of high-frequency trading (HFT) on intraday liquidity of CAC40 stocks listed on Euronext. Spreads display an intraday L-shaped pattern, while quoted depth follows an inverse pattern: low at the open and increasing towards the end of the trading day. When liquidity demand is particularly high, there is a high rate of order cancellations attributable to high-frequency traders who use frequent order cancellations to strategically manage their limit orders and close positions near the market close. Using the generalized method of moments estimator, we generate strong evidence that greater intensity of HFT is associated with lower spreads and higher depth. The positive effect of HFT on liquidity is due mainly to decreased adverse selection costs arising from asymmetric information among market participants.

Suggested Citation

  • Ben Ammar, Imen & Hellara, Slaheddine & Ghadhab, Imen, 2020. "High-frequency trading and stock liquidity: An intraday analysis," Research in International Business and Finance, Elsevier, vol. 53(C).
    • Handle: RePEc:eee:riibaf:v:53:y:2020:i:c:s0275531919309249
    DOI: 10.1016/j.ribaf.2020.101235
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    More about this item

    Keywords

    High-frequency trading; Algorithmic trading; Market microstructure; Intraday liquidity;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G19 - Financial Economics - - General Financial Markets - - - Other

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