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Competition among high-frequency traders, and market quality

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  • Breckenfelder, Johannes

Abstract

We study empirically how competition among high-frequency traders (HFTs) affects their trading behavior and market quality. Our analysis exploits a unique dataset, which allows us to compare environments with and without high-frequency competition, and contains an exogenous event - a tick size reform - which we use to disentangle the effects of the rising share of high-frequency trading in the market from the effects of high-frequency competition. We find that when HFTs compete, their speculative trading increases. As a result, market liquidity deteriorates and short-term volatility rises. Our findings hold for a variety of market quality and high-frequency trading behavior measures. JEL Classification: G12, G14, G15, G18, G23, D4, D61

Suggested Citation

  • Breckenfelder, Johannes, 2019. "Competition among high-frequency traders, and market quality," Working Paper Series 2290, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20192290
    Note: 1125999
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    Cited by:

    1. Hatch, Brian C. & Johnson, Shane A. & Wang, Qin Emma & Zhang, Jun, 2021. "Algorithmic trading and firm value," Journal of Banking & Finance, Elsevier, vol. 125(C).
    2. Yang, Haijun & Ge, Hengshun & Luo, Ying, 2020. "The optimal bid-ask price strategies of high-frequency trading and the effect on market liquidity," Research in International Business and Finance, Elsevier, vol. 53(C).
    3. Christophe Desagre & Floris Laly & Mikael Petitjean, 2025. "Revisiting the trading activity of high-frequency trading firms around ultra-fast flash events," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 11(1), pages 1-37, December.
    4. Ben Ammar, Imen & Hellara, Slaheddine, 2022. "High-frequency trading, stock volatility, and intraday crashes," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 337-344.
    5. Ge, Hengshun & Yang, Haijun & Doukas, John A., 2024. "The optimal strategies of competitive high-frequency traders and effects on market liquidity," International Review of Economics & Finance, Elsevier, vol. 91(C), pages 653-679.
    6. Mark Marner-Hausen, 2022. "Developing a Framework for Real-Time Trading in a Laboratory Financial Market," ECONtribute Discussion Papers Series 172, University of Bonn and University of Cologne, Germany.
    7. Carè, Rosella & Cumming, Douglas, 2024. "Technology and automation in financial trading: A bibliometric review," Research in International Business and Finance, Elsevier, vol. 71(C).
    8. Matteo Aquilina & Eric Budish & Peter O’Neill, 2022. "Quantifying the High-Frequency Trading “Arms Race”," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 137(1), pages 493-564.
    9. Foucault, Thierry & Moinas, Sophie, 2018. "Is Trading Fast Dangerous?," TSE Working Papers 18-881, Toulouse School of Economics (TSE).
    10. Papavassiliou, Vassilios G. & Kinateder, Harald, 2021. "Information shares and market quality before and during the European sovereign debt crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    11. Johann Lussange & Boris Gutkin, 2023. "Order book regulatory impact on stock market quality: a multi-agent reinforcement learning perspective," Papers 2302.04184, arXiv.org.
    12. Aït-Sahalia, Yacine & Brunetti, Celso, 2020. "High frequency traders and the price process," Journal of Econometrics, Elsevier, vol. 217(1), pages 20-45.
    13. Ekinci, Cumhur & Ersan, Oğuz, 2022. "High-frequency trading and market quality: The case of a “slightly exposed” market," International Review of Financial Analysis, Elsevier, vol. 79(C).
    14. Aquilina, Matteo & Budish, Eric B. & O'Neill, Peter, 2020. "Quantifying the High-Frequency Trading "Arms Race": A Simple New Methodology and Estimates," Working Papers 300, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.

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    More about this item

    Keywords

    competition; high-frequency trading; high-frequency trading strategies; tick size reform;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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