Hostname: page-component-7c8c6479df-5xszh Total loading time: 0 Render date: 2024-03-29T06:04:30.427Z Has data issue: false hasContentIssue false

Interactions among High-Frequency Traders

Published online by Cambridge University Press:  25 July 2017

Abstract

Using unique transactions data for individual high-frequency trading (HFT) firms in the U.K. equity market, we examine the extent to which the trading activity of individual HFT firms is correlated with each other and the impact on price efficiency. We find that HFT order flow, net positions, and total volume exhibit significantly higher commonality than those of a comparison group of investment banks. However, intraday HFT order flow commonality is associated with a permanent price impact, suggesting that commonality in HFT activity is information based and so does not generally contribute to undue price pressure and price dislocations.

Type
Research Article
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

We are grateful to Satchit Sagade for his help in cleaning and processing the data. The paper has greatly benefited from the advice of Hendrik Bessembinder (the editor) and Allen Carrion (the referee). Other helpful comments were provided by Monica Billio, Dobrislav Dobrev, Björn Hagströmer, Edwin Schooling Latter, Nick Vause, Graham Young, and seminar participants at the Bank of England, the Bank of Greece, Copenhagen Business School, the Federal Reserve Board, the U.K. Financial Conduct Authority, University of Piraeus, University of York, the 2015 conference on the Development of Securities Markets: Trends, Risks and Policies at Bocconi University, the 2015 conference of the International Association of Applied Econometrics, and the 2014 Ioannina Meeting on Applied Economics and Finance. The views in this paper are solely the responsibility of the authors and should not be interpreted as representing the views of the Bank of England or any of its committees, or the U.K. Financial Conduct Authority, or the Board of Governors of the Federal Reserve System or any other person associated with the Federal Reserve System. Hjalmarsson gratefully acknowledges financial support from the Swedish Research Council (Vetenskapsrådet) under Grant 2014-01429.

References

Anand, A., and Venkataraman, K.. “Market Conditions, Fragility, and the Economics of Market Making.” Journal of Financial Economics, 121 (2016), 327349.Google Scholar
Baron, M.; Brogaard, J.; and Kirilenko, A.. “Risk and Return in High-Frequency Trading.” Working Paper, University of Washington (2014).Google Scholar
Benos, E., and Sagade, S.. “Price Discovery and the Cross-Section of High-Frequency Trading.” Journal of Financial Markets, 30 (2016), 5477.Google Scholar
Boehmer, E.; Li, D.; and Saar, G.. “Correlated High-Frequency Trading.” Working Paper, Cornell University (2016).Google Scholar
Brogaard, J.; Garriott, C.; and Pomeranets, A.. “High-Frequency Trading Competition.” Working Paper, Bank of Canada (2014).Google Scholar
Brogaard, J.; Hagströmer, B.; Nordén, L.; and Riordan, R.. “Trading Fast and Slow: Colocation and Liquidity.” Review of Financial Studies, 28 (2015), 34073443.CrossRefGoogle Scholar
Brogaard, J.; Hendershott, T.; and Riordan, R.. “High-Frequency Trading and Price Discovery.” Review of Financial Studies, 27 (2014), 22672306.Google Scholar
Carrion, A.Very Fast Money: High-Frequency Trading on the NASDAQ.” Journal of Financial Markets, 16 (2013), 680711.Google Scholar
Carrion, A., and Kolay, M.. “Trade Signing in Fast Markets.” Working Paper, University of Utah (2014).Google Scholar
Chaboud, A.; Chiquoine, B.; Hjalmarsson, E.; and Vega, C.. “Rise of the Machines: Algorithmic Trading in the Foreign Exchange Market.” Journal of Finance, 69 (2014), 20452084.CrossRefGoogle Scholar
Chakrabarty, B.; Pascual, R.; and Shkilko, A.. “Evaluating Trade Classification Algorithms: Bulk Volume Classification versus the Tick Rule and the Lee-Ready Algorithm.” Journal of Financial Markets, 25 (2015), 5279.CrossRefGoogle Scholar
DeLong, B.; Shleifer, A.; Summers, L.; and Waldmann, R. J.. “Positive Feedback Investment Strategies and Destabilizing Rational Speculation.” Journal of Finance, 45 (1990), 379395.Google Scholar
Dobrev, D., and Schaumburg, E.. “High-Frequency Cross-Market Trading: Model Free Measurement and Applications.” Working Paper, Board of Governors of the Federal Reserve System (2016).Google Scholar
Driscoll, J. C., and Kraay, A. C.. “Consistent Covariance Matrix Estimation with Spatially Dependent Panel Data.” Review of Economics and Statistics, 80 (1998), 549560.Google Scholar
Easley, D.; Lopéz de Prado, M. M.; and O’Hara, M.. “The Volume Clock: Insights into the High-Frequency Paradigm.” Journal of Portfolio Management, 39 (2012), 1929.Google Scholar
Froot, K.; Scharfstein, D.; and Stein, J.. “Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation.” Journal of Finance, 47 (1992), 14611484.Google Scholar
Hagströmer, B., and Nordén, L.. “The Diversity of High-Frequency Traders.” Journal of Financial Markets, 16 (2013), 741770.Google Scholar
Hagströmer, B.; Nordén, L.; and Zhang, D.. “The Aggressiveness of High-Frequency Traders.” Financial Review, 49 (2014), 395419.Google Scholar
Haldane, A.“The Race to Zero.” Speech, International Economic Association 16th World Congress, Beijing. Available at: https://core.ac.uk/download/pdf/24060887.pdf (2011).Google Scholar
Hall, A. R. Generalized Method of Moments. Oxford, UK: Oxford University Press (2005).Google Scholar
Hendershott, T.; Jones, C.; and Menkveld, A.. “Does Algorithmic Trading Improve Liquidity?Journal of Finance, 66 (2011), 133.CrossRefGoogle Scholar
Hendershott, T., and Riordan, R.. “Algorithmic Trading and the Market for Liquidity.” Journal of Financial and Quantitative Analysis, 48 (2013), 10011024.Google Scholar
Hirschey, N.“Do High-Frequency Traders Anticipate Buying and Selling Pressure?” Working Paper, London Business School (2016).Google Scholar
Holden, C. W., and Jacobsen, S.. “Liquidity Measurement Problems in Fast Competitive Markets: Expensive and Cheap Solutions.” Journal of Finance, 69 (2014), 17471885.Google Scholar
Jarrow, R., and Protter, P.. “A Dysfunctional Role of High Frequency Trading in Electronic Markets.” International Journal of Theoretical and Applied Finance, 15 (2012), 1250022-1–1250022-15.CrossRefGoogle Scholar
Khandani, A., and Lo, A. W.. “What Happened to the Quants in August 2007? Evidence from Factors and Transactions Data.” Journal of Financial Markets, 14 (2011), 146.Google Scholar
Kirilenko, A.; Kyle, A.; Samadi, M.; and Tuzun, T.. “The Flash Crash: High-Frequency Trading in an Electronic Market.” Journal of Finance, forthcoming (2017).Google Scholar
Kondor, P.Risk in Dynamic Arbitrage: Price Effects of Convergence Trading.” Journal of Finance, 64 (2009), 631655.Google Scholar
Korajczyk, R. A., and Murphy, D.. “High-Frequency Market Making to Large Institutional Trades.” Working Paper, Northwestern University (2016).CrossRefGoogle Scholar
Kozhan, R., and Tham, W. W.. “Execution Risk in High-Frequency Arbitrage.” Management Science, 58 (2012), 21312149.Google Scholar
Kreiss, J. P., and Lahiri, S. N.. “Bootstrap Methods for Time Series.” In Handbook of Statistics, Vol. 30, Rao, T. S., Rao, S. S., and Rao, C. R., eds. Oxford, UK: Elsevier North-Holland (2012).Google Scholar
Kyle, A.Continuous Auctions and Insider Trading.” Econometrica, 53 (1985), 13151336.Google Scholar
Lakonishok, J.; Shleifer, A.; and Vishny, R.. “The Impact of Institutional Trading on Stock Prices.” Journal of Financial Economics, 32 (1992), 2343.Google Scholar
Lee, M. C., and Ready, M.. “Inferring Trade Direction from Intraday Data.” Journal of Finance, 46 (1991), 733746.Google Scholar
Martinez, V., and Rosu, I.. “High-Frequency Traders, News and Volatility.” Working Paper, HEC Paris (2013).Google Scholar
Oehmke, M.“Gradual Arbitrage.” Working Paper, Columbia University (2009).Google Scholar
Stein, J.Presidential Address: Sophisticated Investors and Market Efficiency.” Journal of Finance, 64 (2009), 15171548.Google Scholar
Tong, L.“A Blessing or a Curse? The Impact of High Frequency Trading on Institutional Investors.” Working Paper, Fordham University (2015).Google Scholar
van Kervel, V., and Menkveld, A. J.. “High-Frequency Trading around Large Institutional Orders.” Working Paper, VU University Amsterdam (2015).Google Scholar
White, M. J.“Enhancing Our Equity Market Structure.” Speech, Sandler O’Neill & Partners, L.P. Global Exchange and Brokerage Conference, New York, NY. Available at: http://www.sec.gov/News/Speech/Detail/Speech/1370542004312 (2014).Google Scholar