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Response and Liquidity Risk Modeling of High-Frequency Trading Strategies under Extreme Market Events

In: Proceedings of the 2025 International Conference on Financial Risk and Investment Management (ICFRIM 2025)

Author

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  • Zhanpeng Jin

    (South China University of Technology, School of Foreign Languages)

Abstract

This study explores the response characteristics of high-frequency trading strategies under extreme market events and their impact on market liquidity. Based on the high-frequency trading data of the Industrial and Commercial Bank of China (601398) during the A-share market volatility in March 2022, this paper analyzes the relationship between ghost liquidity indicators (withdrawal rate and ghost order ratio) and market liquidity, constructs a multiple linear regression model, and studies the influence mechanism of high-frequency trading behavior on market liquidity. The results show that the increase of ghost order ratio leads to the increase of bid-ask spread significantly, while the effect of withdrawal rate on bid-ask spread is relatively weak. During extreme market events, HFT exhibited a clear liquidity withdrawal characteristic, with the withdrawal rate exceeding 50% and bid-ask spreads widening significantly when market volatility increased in mid-March. Through the hysteresis effect analysis, it is found that there is a significant time dependence between ghost liquidity and market trading indicators. The study suggests to strengthen the supervision of ghost liquidity behavior and restrict the pending order behavior that does not have the actual trading intention. In the future, the research can be expanded to different markets and asset classes, introducing more macroeconomic variables, and using nonlinear models to improve forecasting power. This study provides a new empirical basis for understanding the behavior characteristics of high-frequency trading under extreme market conditions.

Suggested Citation

  • Zhanpeng Jin, 2025. "Response and Liquidity Risk Modeling of High-Frequency Trading Strategies under Extreme Market Events," Advances in Economics, Business and Management Research, in: Maizaitulaidawati Md Husin (ed.), Proceedings of the 2025 International Conference on Financial Risk and Investment Management (ICFRIM 2025), pages 1056-1065, Springer.
    • Handle: RePEc:spr:advbcp:978-94-6463-748-9_114
    DOI: 10.2991/978-94-6463-748-9_114
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