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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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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2290~b5fec3a181.en.pdf
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    References listed on IDEAS

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    Cited by:

    1. 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).
    2. Foucault, Thierry & Moinas, Sophie, 2018. "Is Trading Fast Dangerous?," TSE Working Papers 18-881, Toulouse School of Economics (TSE).
    3. Aït-Sahalia, Yacine & Brunetti, Celso, 2020. "High frequency traders and the price process," Journal of Econometrics, Elsevier, vol. 217(1), pages 20-45.

    More about this item

    Keywords

    competition; high-frequency trading; high-frequency trading strategies; tick size reform;

    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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