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Simulating the Synchronizing Behavior of High-Frequency Trading in Multiple Markets

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  • Benjamin Myers
  • Austin Gerig

Abstract

Nearly one-half of all trades in financial markets are executed by high-speed, autonomous computer programs -- a type of trading often called high-frequency trading (HFT). Although evidence suggests that HFT increases the efficiency of markets, it is unclear how or why it produces this outcome. Here we create a simple model to study the impact of HFT on investors who trade similar securities in different markets. We show that HFT can improve liquidity by allowing more transactions to take place without adversely affecting pricing or volatility. In the model, HFT synchronizes the prices of the securities, which allows buyers and sellers to find one another across markets and increases the likelihood of competitive orders being filled.

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File URL: http://arxiv.org/pdf/1311.4160
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Paper provided by arXiv.org in its series Papers with number 1311.4160.

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Date of creation: Nov 2013
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Handle: RePEc:arx:papers:1311.4160

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Web page: http://arxiv.org/

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  1. Austin Gerig, 2012. "High-Frequency Trading Synchronizes Prices in Financial Markets," Papers 1211.1919, arXiv.org.
  2. Terrence Hendershott & Charles M. Jones & Albert J. Menkveld, 2011. "Does Algorithmic Trading Improve Liquidity?," Journal of Finance, American Finance Association, vol. 66(1), pages 1-33, 02.
  3. Gode, Dhananjay K & Sunder, Shyam, 1993. "Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 119-37, February.
  4. Hasbrouck, Joel & Saar, Gideon, 2013. "Low-latency trading," Journal of Financial Markets, Elsevier, vol. 16(4), pages 646-679.
  5. Austin Gerig & David Michayluk, 2010. "Automated Liquidity Provision and the Demise of Traditional Market Making," Papers 1007.2352, arXiv.org.
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