High-Frequency Trading Competition

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. iii Terms of use: Documents in AbstractWe analyze trading dynamics as successive high-frequency trading (HFT) firms begin to trade stocks in an equity market. Entrants compete with incumbents for volume, and there is crowding out. Earlier entry is associated with larger effects. After Passive HFT entry, incumbent spreads tighten. After Aggressive HFT entry, incumbent order flow loses informedness. Revenue data suggest entry reduces the profitability of HFT activity. The results show that part of the value of HFT comes from its competitiveness. JEL classification: G20, G14, L1Bank classification: Financial markets; Market structure and pricing RésuméLes auteurs analysent la dynamique des échanges après que des entreprises qui font des transactions à haute fréquence eurent commencé successivement à négocier des titres sur le marché des actions. Les nouveaux venus rivalisent avec les acteurs déjà présents pour obtenir plus de volume, ce qui entraîne un effet d'éviction. Les effets exercés par les premiers entrants sont plus prononcés. L'entrée de participants passifs donne lieu à un resserrement de la fourchette de cotation pour les participants existants. Après l'arrivée de participants agressifs, le contenu informationnel du flux d'ordres des participants existants diminue. En outre, les données tendent à indiquer une baisse de rentabilité des transactions à haute fréquence. Les résultats de l'étude montrent que l'intérêt de la négociation à haute fréquence réside en partie dans la compétitivité de cette activité.Classification JEL : G20, G14, L1 Classification de la Banque : Marchés financiers; Structure de marché et fixation des prix 2

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

“…Previous work examining HFT's impact on liquidity deliver mixed results (see for example Brogaard, 2010;Hasbrouck and Saar, 2013;Jain et al, 2016;Li et al, 2018;Baldauf and Mollner, 2020;Ammar et al, 2020 for the positive effects; and Egginton et al, 2016;Kirilenko et al, 2017;Breckenfelder, 2019 for the negative effects). It is widely suggested that HFT improves market quality by providing liquidity (e.g., Malinova et al, 2013;Menkveld, 2013;Brogaard and Garriott, 2019;Jarnecic and Snape, 2014;and Aït-Sahalia and Saglam, 2013). On the contrary, many studies show large amounts of correlated liquidity withdrawal HFTs are engaged in (e.g., Van Kervel, 2015;Cespa and Foucault, 2014;Anand and Venkataraman, 2016;Malceniece et al, 2019).…”

“…Breckenfelder (2019) analyzes a channel through which HFTs may reduce market liquidity, namely the competition, and detects that market liquidity deteriorates through higher competition among HFTs. Other studies, such as Bernales ( 2019), and Brogaard and Garriott (2019), focus also on HFT competition in the examination of HFT's role in liquidity. Brogaard and Garriott (2019) examine a sample from Alpha, a recently introduced Canadian stock market.…”

“…Other studies, such as Bernales ( 2019), and Brogaard and Garriott (2019), focus also on HFT competition in the examination of HFT's role in liquidity. Brogaard and Garriott (2019) examine a sample from Alpha, a recently introduced Canadian stock market. Their dataset begins with an HFT-free period and spans through four years with the entry of 11 HFTs.…”

“…Chordia et al (2018), on the other hand, show that S&P 500 exchange-traded fund and E-mini S&P 500 futures contract prices react to macroeconomic surprise news in 2008-2014 within the first five milliseconds where trading intensity rises by more than 100-fold. Reaching beyond the scope of this study, HFT related topics include but not limited to its impacts on market quality, i.e., on liquidity (Hasbrouck and Saar, 2013;Brogaard et al, 2014;Brogaard et al, 2017) and on volatility (Brogaard, 2010;Zhang, 2010;Chaboud et al, 2014), HFT effects on price discovery (Carrion, 2013;Menkveld, 2013;Conrad et al, 2015), HFT through market downturns and crashes (Kirilenko et al, 2017;Brogaard et al, 2017; "high frequency trading" "algorithmic trading" "stock exchange" "stock market" Madhavan, 2012;McInish et al, 2014), HFT impacts on other participants: crowding out effect (Malinova et al, 2013;Jones, 2013;Hoffmann, 2014), adverse selection effect (Cartea and Penalva, 2012;Biais et al, 2015;Egginton et al, 2016), welfare effects (Boehmer et al, 2015;Stiglitz, 2014;Budish et al, 2015), vast HFT investments (Menkveld, 2013;Biais et al, 2015;Budish et al, 2015), HFT competition (Baron et al, 2019;Brogaard and Garriott, 2019), HFT profits (Malinova et al, 2013;Scholtus et al, 2014).…”

Impact of MiFID II on the Market Volatility—Analysis on Some Developed and Emerging European Stock Markets

“…Developments in trading technologies fostered the use of an automated and very fast trading infrastructure. The increase in algorithmic trading over recent years, considered beneficial by many in terms of increasing market efficiency due to increased liquidity (Hendershot et al 2011), facilitation of larger trades (Hasbrouck and Saar 2013), improved pricing discovery (Brogaard and Garriott 2019), lower trading costs (Chlistalla 2011) and narrower bid-ask spreads (Hagströmer and Norden 2013) also created new risks. The regulation of high-frequency algorithmic trading by MiFID II has an aim of promoting financial stability and ensuring orderly markets, interrupting period of excessive volatility in order to give investors the possibility to reassess their positions.…”