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The diversity of high-frequency traders

Author

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  • Hagströmer, Björn
  • Nordén, Lars

Abstract

The regulatory debate concerning high-frequency trading (HFT) emphasizes the importance of distinguishing different HFT strategies and their influence on market quality. Using data from NASDAQ-OMX Stockholm, we compare market-making HFTs to opportunistic HFTs. We find that market makers constitute the lion's share of HFT trading volume (63–72%) and limit order traffic (81–86%). Furthermore, market makers have higher order-to-trade ratios and lower latency than opportunistic HFTs. In a natural experiment based on tick size changes, we find that the activity of market-making HFTs mitigates intraday price volatility.

Suggested Citation

  • Hagströmer, Björn & Nordén, Lars, 2013. "The diversity of high-frequency traders," Journal of Financial Markets, Elsevier, vol. 16(4), pages 741-770.
  • Handle: RePEc:eee:finmar:v:16:y:2013:i:4:p:741-770
    DOI: 10.1016/j.finmar.2013.05.009
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    References listed on IDEAS

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    1. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, vol. 3(3), pages 205-258, August.
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    6. Hasbrouck, Joel & Saar, Gideon, 2013. "Low-latency trading," Journal of Financial Markets, Elsevier, vol. 16(4), pages 646-679.
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    Citations

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    Cited by:

    1. Hoffmann, Peter, 2013. "A dynamic limit order market with fast and slow traders," Working Paper Series 1526, European Central Bank.
    2. Marlene Haas & Marius Andrei Zoican, 2016. "Beyond the Frequency Wall: Speed and Liquidity on Batch Auction Markets," Post-Print hal-01484805, HAL.
    3. repec:spr:elmark:v:28:y:2018:i:3:d:10.1007_s12525-017-0264-3 is not listed on IDEAS
    4. Clapham, Benjamin & Gomber, Peter & Panz, Sven, 2017. "Coordination of circuit breakers? Volume migration and volatility spillover in fagmented markets," SAFE Working Paper Series 196, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    5. Conrad, Jennifer & Wahal, Sunil & Xiang, Jin, 2015. "High-frequency quoting, trading, and the efficiency of prices," Journal of Financial Economics, Elsevier, vol. 116(2), pages 271-291.
    6. Jonathan Brogaard & Corey Garriott & Anna Pomeranets, 2014. "High-Frequency Trading Competition," Staff Working Papers 14-19, Bank of Canada.
    7. repec:wsi:ijtafx:v:17:y:2014:i:05:n:s0219024914500344 is not listed on IDEAS
    8. repec:wsi:qjfxxx:v:03:y:2013:i:02:n:s2010139213500122 is not listed on IDEAS
    9. Breckenfelder, Johannes, 2013. "Competition between high-frequency traders, and market quality," MPRA Paper 66715, University Library of Munich, Germany, revised Dec 2013.
    10. Taiga Saito & Akihiko Takahashi, 2018. "Stochastic Differential Game in High Frequency Market," CIRJE F-Series CIRJE-F-1087, CIRJE, Faculty of Economics, University of Tokyo.
    11. repec:eee:finlet:v:24:y:2018:i:c:p:313-320 is not listed on IDEAS
    12. Albert J. Menkveld & Marius A. Zoican, 2017. "Need for Speed? Exchange Latency and Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 30(4), pages 1188-1228.
    13. Kauffman, Robert J. & Liu, Jun & Ma, Dan, 2015. "Innovations in financial IS and technology ecosystems: High-frequency trading in the equity market," Technological Forecasting and Social Change, Elsevier, vol. 99(C), pages 339-354.
    14. repec:scn:000ven:127602 is not listed on IDEAS
    15. Hoffmann, Peter, 2014. "A dynamic limit order market with fast and slow traders," Journal of Financial Economics, Elsevier, vol. 113(1), pages 156-169.
    16. repec:eee:phsmap:v:484:y:2017:i:c:p:168-181 is not listed on IDEAS
    17. Hasbrouck, Joel & Saar, Gideon, 2013. "Low-latency trading," Journal of Financial Markets, Elsevier, vol. 16(4), pages 646-679.
    18. Bellia, Mario & Pelizzon, Loriana & Subrahmanyam, Marti & Uno, Jun & Yuferova, Darya, 2017. "Coming early to the party," SAFE Working Paper Series 182, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.

    More about this item

    Keywords

    High-frequency trading; Market making; Market quality; Volatility;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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