This paper considers the role of high-frequency trading in a dynamic limit order market. Fast traders׳ ability to revise their quotes quickly after news arrivals helps to reduce the inefficiency that ...is rooted in the risk of being picked off, which increases trade. However, their presence induces slow traders to strategically submit limit orders with a lower execution probability, thereby reducing trade. Because speed is a source of market power, it enables fast traders to extract rents from other market participants and triggers a costly arms race that reduces social welfare. The model generates a number of testable implications concerning the effects of high-frequency trading in limit order markets.
We explore the sharp uptrend in recent trading activity and accompanying changes in market efficiency. Higher turnover has been associated with more frequent smaller trades, which have progressively ...formed a larger fraction of trading volume over time. Evidence indicates that secular decreases in trading costs have influenced the turnover trend. Turnover has increased the most for stocks with the greatest level of institutional holdings, suggesting professional investing as a key contributor to the turnover trend. Variance ratio tests suggest that more institutional trading has increased information-based trading. Intraday volatility has decreased and prices conform more closely to random walk in recent years. The sensitivity of turnover to past returns has increased and cross-sectional predictability of returns has decreased significantly, revealing a more widespread use of quantitative trading strategies that allow for more efficient securities prices.
We propose a direct measure of abnormal institutional investor attention (AIA) using news searching and news reading activity for specific stocks on Bloomberg terminals. AIA is highly correlated with ...institutional trading measures and related to, but different from, other investor attention proxies. Contrasting AIA with retail attention measured by Google search activity, we find that institutional attention responds more quickly to major news events, leads retail attention, and facilitates permanent price adjustment. The well-documented price drifts following both earnings announcements and analyst recommendation changes are driven by announcements to which institutional investors fail to pay sufficient attention.
We describe the process through which the Securities and Exchange Commission (SEC) makes filings "publicly available." For a sample of Form 4 (insider trade) filings, we show that, during the period ...we examine, the majority of filings are available to paying subscribers of the SEC's public dissemination system (PDS) feed before they are posted to the EDGAR website, and so provide subscribers and their clients with a private advantage. We show that this advantage translates into an economically significant trading advantage, and prices, volumes, and spreads respond to the news contained in filings beginning around 30 seconds before public posting. These findings indicate that the SEC dissemination process does not always provide a level playing field and that the meaning of publicly available information in capital markets is no longer simple or obvious. In response to our study, the SEC launched an investigation and agreed to eliminate the PDS timing advantage.
This study proposes a hybrid energy trading scheme for peer-to-peer (P2P) energy trading in transactive energy markets. Market players can participate in different markets, including local markets, ...trading with neighbourhood areas, and traditional trading with the grid. In each local market, a community manager (CM) facilitates energy trading and negotiates with other CMs for neighbourhood trading. Based on the heterogeneous preferences of players of each community, each local market has a different price, which is different from market price for neighbourhood trading and trading with the grid. A distributed market clearing mechanism is presented that incorporates coordination among different markets. Also, a network utilisation charge function is defined to apply price signals to the market players to reflect network constraints in energy trading. These price signals are calculated based on the technical constraints in each market and are applied to the corresponding players based on their contribution to network constraints violation. Performance of the proposed trading scheme is evaluated against different market structures and through several case studies.
We model endogenous technology adoption and competition among liquidity providers with access to High-Frequency Trading (HFT) technology. HFT technology provides speed and information advantages. ...Information advantages may restore excessively toxic markets. Speed advantages may reduce resource costs for liquidity provision. Both effects increase liquidity and welfare. However, informationally advantaged HFTs may impose a winner’s curse on traditional market makers, who in response reduce their participation. This increases resource costs and lowers the execution likelihood for market orders, thereby reducing liquidity and welfare. This result also holds when HFT technology dominates traditional technology in terms of costs and informational advantages.
Risk and Return in High-Frequency Trading Baron, Matthew; Brogaard, Jonathan; Hagströmer, Björn ...
Journal of financial and quantitative analysis,
06/2019, Letnik:
54, Številka:
3
Journal Article
Recenzirano
Odprti dostop
We study performance and competition among firms engaging in high-frequency trading (HFT). We construct measures of latency and find that differences in relative latency account for large differences ...in HFT firms' trading performance. HFT firms that improve their latency rank due to colocation upgrades see improved trading performance. The stronger performance associated with speed comes through both the short-lived information channel and the risk management channel, and speed is useful for various strategies, including market making and cross-market arbitrage. We find empirical support for many predictions regarding relative latency competition.
We provide a theory of trading through intermediaries in over-the-counter markets. The role of intermediaries is to sustain trade. In our model, traders are connected through an informational ...network. Agents observe their neighbors’ actions and can trade with their counterparty in a given period through a path of intermediaries in the network. Nevertheless, agents can renege on their obligations. We show that trading through an informational network is essential to support trade when agents infrequently meet the same counteparty. However, intermediaries must receive fees to implement trades. Concentrated intermediation, as represented by a star network, is both constrained efficient and stable when agents incur linking costs. The center agent in a star can receive higher fees as well.
Managing the prediction of metrics in high‐frequency financial markets is a challenging task. An efficient way is by monitoring the dynamics of a limit order book to identify the information edge. ...This paper describes the first publicly available benchmark dataset of high‐frequency limit order markets for mid‐price prediction. We extracted normalized data representations of time series data for five stocks from the Nasdaq Nordic stock market for a time period of 10 consecutive days, leading to a dataset of ∼4,000,000 time series samples in total. A day‐based anchored cross‐validation experimental protocol is also provided that can be used as a benchmark for comparing the performance of state‐of‐the‐art methodologies. Performance of baseline approaches are also provided to facilitate experimental comparisons. We expect that such a large‐scale dataset can serve as a testbed for devising novel solutions of expert systems for high‐frequency limit order book data analysis.
We analyze dynamic trading by an activist investor who can expend costly effort to affect firm value. We obtain the equilibrium in closed form for a general activism technology, including both binary ...and continuous outcomes. Variation in parameters can produce either positive or negative relations between market liquidity and economic efficiency, depending on the activism technology and model parameters. Two results that contrast with the previous literature are that (a) the relationship between market liquidity and economic efficiency is independent of the activist's initial stake for a broad set of activism technologies, and (b) an increase in noise trading can reduce market liquidity because it increases uncertainty about the activist's trades (the activist trades in the opposite direction of noise traders) and thereby increases information asymmetry about the activist's intentions.
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