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High-Frequency Trading Competition

Author

Listed:
  • Jonathan Brogaard
  • Corey Garriott
  • Anna Pomeranets

Abstract

We analyze trading dynamics as successive high-frequency trading (HFT) firms begin to trade stocks in an equity market. Entrants compete with incumbents for volume, and there is crowding out. Earlier entry is associated with larger effects. After Passive HFT entry, incumbent spreads tighten. After Aggressive HFT entry, incumbent order flow loses informedness. Revenue datasuggest entry reduces the profitability of HFT activity. The results show that part of the value of HFT comes from its competitiveness.

Suggested Citation

  • Jonathan Brogaard & Corey Garriott & Anna Pomeranets, 2014. "High-Frequency Trading Competition," Staff Working Papers 14-19, Bank of Canada.
    • Handle: RePEc:bca:bocawp:14-19
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    References listed on IDEAS

    as
    1. Breckenfelder, Johannes, 2013. "Competition between high-frequency traders, and market quality," MPRA Paper 66715, University Library of Munich, Germany, revised Dec 2013.
    2. Biais, Bruno & Foucault, Thierry & Moinas, Sophie, 2015. "Equilibrium fast trading," Journal of Financial Economics, Elsevier, vol. 116(2), pages 292-313.
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    16. Hoffmann, Peter, 2012. "A dynamic limit order market with fast and slow traders," MPRA Paper 44621, University Library of Munich, Germany, revised Jan 2013.
    17. Brogaard, Jonathan & Hendershott, Terrence & Riordan, Ryan, 2013. "High frequency trading and price discovery," Working Paper Series 1602, European Central Bank.
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    19. Battalio, Robert H, 1997. " Third Market Broker-Dealers: Cost Competitors or Cream Skimmers?," Journal of Finance, American Finance Association, vol. 52(1), pages 341-352, March.
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    Cited by:

    1. repec:red:issued:18-287 is not listed on IDEAS
    2. Benes, Evangelos & Brugler, James & Hjalmarsson, Erik & Zikes, Filip, 2016. "Interactions among High-Frequency Traders," Working Papers in Economics 680, University of Gothenburg, Department of Economics.
    3. Baron, Matthew & Brogaard, Jonathan & Hagströmer, Björn & Kirilenko, Andrei, 2019. "Risk and Return in High-Frequency Trading," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(3), pages 993-1024, June.
    4. Adrian, Tobias & Capponi, Agostino & Vogt, Erik & Zhang, Hongzhong, 2016. "Intraday market making with overnight inventory costs," Staff Reports 799, Federal Reserve Bank of New York, revised 01 Nov 2019.
    5. Oliver Linton & Soheil Mahmoodzadeh, 2018. "Implications of High-Frequency Trading for Security Markets," Annual Review of Economics, Annual Reviews, vol. 10(1), pages 237-259, August.
    6. Morten Linnemann Bech & Anamaria Illes & Ulf Lewrick & Andreas Schrimpf, 2016. "Hanging up the phone - electronic trading in fixed income markets and its implications," BIS Quarterly Review, Bank for International Settlements, March.
    7. Michael Brolley & David A. Cimon, 2018. "Order Flow Segmentation, Liquidity and Price Discovery: The Role of Latency Delays," Staff Working Papers 18-16, Bank of Canada.
    8. repec:scn:000ven:127602 is not listed on IDEAS
    9. Brogaard, Jonathan & Hendershott, Terrence & Riordan, Ryan, 2017. "High frequency trading and the 2008 short-sale ban," Journal of Financial Economics, Elsevier, vol. 124(1), pages 22-42.
    10. Breckenfelder, Johannes, 2019. "Competition among high-frequency traders, and market quality," Working Paper Series 2290, European Central Bank.
    11. Henryk Gurgul & Robert Syrek, 2016. "The logarithmic ACD model: The microstructure of the German and Polish stock markets," Managerial Economics, AGH University of Science and Technology, Faculty of Management, vol. 17(1), pages 77-92.
    12. Aldrich, Eric M. & Friedman, Daniel, 2017. "Order protection through delayed messaging," Discussion Papers, Research Professorship Market Design: Theory and Pragmatics SP II 2017-502, WZB Berlin Social Science Center.

    More about this item

    Keywords

    Financial markets; Market structure and pricing;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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