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High Frequency Trading in the Equity Markets During U.S. Treasury POMO

Author

Listed:
  • Cheng Gao

    (Rutgers University)

  • Bruce Mizrach

    () (Rutgers University)

Abstract

We analyze high frequency trading (HFT) activity in equities during U.S. Treasury permanent open market (POMO) purchases by the Federal Reserve. We construct a model to study HFT quote and trade behavior when private information is released and confirm it empirically. We estimate that HFT firms reduce their inside quote participation by up to 8% during POMO auctions. HFT firms trade more aggressively, and they supply less passive liquidity to non-HFT firms. Market impact also rises during Treasury POMO. Aggressive HFT trading becomes more consistently profitable, and HFT firms earn a higher return per share. We also estimate that HFT firms earn profits of over $105 million during U.S. Treasury POMO events.

Suggested Citation

  • Cheng Gao & Bruce Mizrach, 2013. "High Frequency Trading in the Equity Markets During U.S. Treasury POMO," Departmental Working Papers 201320, Rutgers University, Department of Economics.
  • Handle: RePEc:rut:rutres:201320
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    More about this item

    Keywords

    high frequency trading; Federal Reserve; open market operations; private information;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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