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The Provision of Liquidity by High-Frequency Participants

Author

Listed:
  • Michael Goldstein
  • Elvis Jarnecic
  • Mark Snape

Abstract

This paper examines the order submission strategies and supply of liquidity by high-frequency participants versus the remainder of participants in the limit order book. The results show that high-frequency participants submit orders at multiple prices in the limit order book, concentrated at or within the quote. This activity translates into the provision of liquidity on an on-going basis, which is robust to fast versus slow and volatile markets, together suggesting that high-frequency participants resolve temporal liquidity imbalances in the limit order book. The evidence is consistent with high-frequency trading (HFT) improving market liquidity, but there remain issues surrounding high-frequency participants’ effect on market depth and the difficulty of trading of non-HFT participants.

Suggested Citation

  • Michael Goldstein & Elvis Jarnecic & Mark Snape, 2014. "The Provision of Liquidity by High-Frequency Participants," The Financial Review, Eastern Finance Association, vol. 49(2), pages 371-394, May.
    • Handle: RePEc:bla:finrev:v:49:y:2014:i:2:p:371-394
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    File URL: http://hdl.handle.net/10.1111/fire.12040
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    1. repec:eee:pacfin:v:45:y:2017:i:c:p:91-102 is not listed on IDEAS
    2. repec:eee:finlet:v:26:y:2018:i:c:p:198-203 is not listed on IDEAS
    3. Upson, James & Van Ness, Robert A., 2017. "Multiple markets, algorithmic trading, and market liquidity," Journal of Financial Markets, Elsevier, vol. 32(C), pages 49-68.
    4. Tian, Xiao & Do, Binh & Duong, Huu Nhan & Kalev, Petko S., 2015. "Liquidity provision and informed trading by individual investors," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 143-162.
    5. OUATTARA, Aboudou, 2016. "Impact of the transition to continous trading on emerging financial market's liquidity : Case study of the West Africa Regional Exchange Market (BRVM)," MPRA Paper 75391, University Library of Munich, Germany.
    6. Serbera, Jean-Philippe & Paumard, Pascal, 2016. "The fall of high-frequency trading: A survey of competition and profits," Research in International Business and Finance, Elsevier, vol. 36(C), pages 271-287.
    7. repec:eee:pacfin:v:53:y:2019:i:c:p:186-207 is not listed on IDEAS
    8. Manahov, Viktor, 2016. "A note on the relationship between high-frequency trading and latency arbitrage," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 281-296.
    9. repec:eee:pacfin:v:51:y:2018:i:c:p:366-375 is not listed on IDEAS
    10. repec:spr:annopr:v:260:y:2018:i:1:d:10.1007_s10479-016-2286-1 is not listed on IDEAS
    11. Mestel, Roland & Murg, Michael & Theissen, Erik, 2018. "Algorithmic trading and liquidity: Long term evidence from Austria," Finance Research Letters, Elsevier, vol. 26(C), pages 198-203.
    12. repec:eee:pacfin:v:45:y:2017:i:c:p:82-90 is not listed on IDEAS
    13. repec:mup:actaun:actaun_2016064061911 is not listed on IDEAS
    14. Nidhi Aggarwal & Venkatesh Panchapagesan & Susan Thomas, 2019. "When do regulatory interventions work?," Working Papers id:13040, eSocialSciences.
    15. Breckenfelder, Johannes, 2019. "Competition among high-frequency traders, and market quality," Working Paper Series 2290, European Central Bank.
    16. Wang, Qin & Zhang, Jun, 2015. "Does individual investor trading impact firm valuation?," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 120-135.

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