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Competition between high-frequency traders, and market quality

Author

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  • Breckenfelder, Johannes

Abstract

This is the first empirical evidence on the competition between high-frequency traders (HFTs) and its influence on market quality. We exploit the first entries of international HFTs into the Swedish equity market in 2009 and conduct a difference-in-differences analysis using trade-by-trade data. To further identify the effect, we use the Federation of European Securities Exchanges (FESE) tick size harmonization as an exogenous event that caused HFTs to start trading in stocks. When HFTs compete for trades their liquidity consumption increases. As a result, liquidity deteriorates significantly and short-term volatility rises.

Suggested Citation

  • Breckenfelder, Johannes, 2013. "Competition between high-frequency traders, and market quality," MPRA Paper 66715, University Library of Munich, Germany, revised Dec 2013.
  • Handle: RePEc:pra:mprapa:66715
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    File URL: https://mpra.ub.uni-muenchen.de/66715/3/MPRA_paper_66715.pdf
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    References listed on IDEAS

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    1. De Long, J Bradford, et al, 1990. " Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-395, June.
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    3. Dimitri Vayanos & Jiang Wang, 2012. "Liquidity and Asset Returns Under Asymmetric Information and Imperfect Competition," Review of Financial Studies, Society for Financial Studies, vol. 25(5), pages 1339-1365.
    4. Markus K. Brunnermeier & Lasse Heje Pedersen, 2005. "Predatory Trading," Journal of Finance, American Finance Association, vol. 60(4), pages 1825-1863, August.
    5. Hendershott, Terrence & Riordan, Ryan, 2013. "Algorithmic Trading and the Market for Liquidity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 48(04), pages 1001-1024, August.
    6. Menkveld, Albert J., 2013. "High frequency trading and the new market makers," Journal of Financial Markets, Elsevier, vol. 16(4), pages 712-740.
    7. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-In-Differences Estimates?," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 249-275.
    8. Carrion, Allen, 2013. "Very fast money: High-frequency trading on the NASDAQ," Journal of Financial Markets, Elsevier, vol. 16(4), pages 680-711.
    9. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    10. Hagströmer, Björn & Nordén, Lars, 2013. "The diversity of high-frequency traders," Journal of Financial Markets, Elsevier, vol. 16(4), pages 741-770.
    11. Pankaj K. Jain, 2005. "Financial Market Design and the Equity Premium: Electronic versus Floor Trading," Journal of Finance, American Finance Association, vol. 60(6), pages 2955-2985, December.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Sandrine Jacob Leal & Mauro Napoletano & Andrea Roventini & Giorgio Fagiolo, 2016. "Rock around the clock: An agent-based model of low- and high-frequency trading," Journal of Evolutionary Economics, Springer, vol. 26(1), pages 49-76, March.
    2. Sandrine Jacob Leal & Mauro Napoletano & Andrea Roventini & Giorgio Fagiolo, 2016. "Rock around the clock: An agent-based model of low- and high-frequency trading," Journal of Evolutionary Economics, Springer, vol. 26(1), pages 49-76, March.
    3. Giovanni Cespa & Xavier Vives, 2016. "High Frequency Trading and Fragility," CESifo Working Paper Series 6279, CESifo Group Munich.
    4. Sandrine Jacob Leal & Mauro Napoletano, 2016. "Market Stability vs. Market Resilience: Regulatory Policies Experiments in an Agent-Based Model with Low- and High- Frequency Trading," Sciences Po publications 2016-12, Sciences Po.
    5. Jonathan Brogaard & Corey Garriott & Anna Pomeranets, 2014. "High-Frequency Trading Competition," Staff Working Papers 14-19, Bank of Canada.
    6. Sandrine Jacob Leal & Mauro Napoletano, 2017. "Market Stability vs. Market Resilience: Regulatory Policies Experiments in an Agent-Based Model with Low- and High-Frequency Trading," Post-Print hal-01768876, HAL.
    7. Francis Breedon & Louisa Chen & Angelo Ranaldo & Nicholas Vause, 2018. "Judgement Day: Algorithmic Trading Around the Swiss Franc Cap Removal," Working Papers on Finance 1808, University of St. Gallen, School of Finance.
    8. repec:eee:pacfin:v:45:y:2017:i:c:p:91-102 is not listed on IDEAS
    9. Foucault, Thierry & Moinas, Sophie, 2018. "Is Trading Fast Dangerous?," TSE Working Papers 18-881, Toulouse School of Economics (TSE).
    10. 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.
    11. 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.
    12. Roland Mestel & Michael Murg & Erik Theissen, 2018. "Algorithmic Trading and Liquidity: Long Term Evidence from Austria," Working Paper Series, Social and Economic Sciences 2018-03, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.
    13. Schlepper, Kathi, 2016. "High-frequency trading in the Bund futures market," Discussion Papers 15/2016, Deutsche Bundesbank.

    More about this item

    Keywords

    competition; high-frequency trading; tick size harmonization; FESE; changes in competition;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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