High-Frequency Trading and its Impact on Market Liquidity: A Review of Literature

Abstract

High-frequency trading (HFT) has been dominating the activity in developed financial markets in the last two decades. Despite its recent formation, the literature on the impacts of HFT on financial markets and participants is broad. However, there are ongoing debates and unanswered questions within many subtopics. We survey through the research towards HFT effects on liquidity in an attempt to explain the coexistence of evidence regarding both the positive and the negative impacts of HFT. We name two main factors leading to mixed results. Former concerns the negative market conditions such as intraday shocks, through which HFT trading patterns may sharply change. Latter regards the certain characteristics of HFT liquidity provision with the potential to present externalities for the market.2 BYX exchange utilized by CBOE reduced order processing times by around sevenfold from 445 microseconds in 2009 to 64 microseconds in 2018 (Baldauf and Mollner, 2020). HFT firms are in an arms race that leads them to send data from exchanges to electronic traders in latencies as small as 4 nanoseconds (Sprothen, 2016). 3 Throughout the text, we use 'high-frequency trading (trader)' and 'low-latency trading (trader)' interchangeably. We use 'HFT' as the acronym for high-frequency trading; 'HFTs' as the acronym for high-frequency traders; and non-HFTs as the acronym for low-frequency traders (traders other than high-frequency traders).

High-Frequency Trading Using Machine Learning: A Comprehensive Analysis

“…Reference [2] examines the diverse effects of High-Frequency Trading (HFT) on financial markets. It acknowledges both positive influences, such as enhanced liquidity provision, and negative consequences, including extreme price movements.…”