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.
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.
High-Frequency Trading and Price Discovery Brogaard, Jonathan; Hendershott, Terrence; Riordan, Ryan
The Review of financial studies,
08/2014, Letnik:
27, Številka:
8
Journal Article
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We examine the role of high-frequency traders (HFTs) in price discovery and price efficiency. Overall HFTs facilitate price efficiency by trading in the direction of permanent price changes and in ...the opposite direction of transitory pricing errors, both on average and on the highest volatility days. This is done through their liquidity demanding orders. In contrast, HFTs' liquidity supplying orders are adversely selected. The direction of HFTs' trading predicts price changes over short horizons measured in seconds. The direction of HFTs' trading is correlated with public information, such as macro news announcements, market-wide price movements, and limit order book imbalances.
We characterize the dynamic fragmentation of U.S. equity markets using a unique data set that disaggregates dark transactions by venue types. The “pecking order” hypothesis of trading venues states ...that investors “sort” various venue types, putting low-cost-low-immediacy venues on top and high-cost-high-immediacy venues at the bottom. Hence, midpoint dark pools on top, non-midpoint dark pools in the middle, and lit markets at the bottom. As predicted, following VIX shocks, macroeconomic news, and firms’ earnings surprises, changes in venue market shares become progressively more positive (or less negative) down the pecking order. We further document heterogeneity across dark venue types and stock size groups.
We build an agent-based model to study how the interplay between low- and high-frequency trading affects asset price dynamics. Our main goal is to investigate whether high-frequency trading ...exacerbates market volatility and generates flash crashes. In the model, low-frequency agents adopt trading rules based on chronological time and can switch between fundamentalist and chartist strategies. By contrast, high-frequency traders activation is event-driven and depends on price fluctuations. High-frequency traders use directional strategies to exploit market information produced by low-frequency traders. Monte-Carlo simulations reveal that the model replicates the main stylized facts of financial markets. Furthermore, we find that the presence of high-frequency traders increases market volatility and plays a fundamental role in the generation of flash crashes. The emergence of flash crashes is explained by two salient characteristics of high-frequency traders, i.e., their ability to
i.
generate high bid-ask spreads and
ii.
synchronize on the sell side of the limit order book. Finally, we find that higher rates of order cancellation by high-frequency traders increase the incidence of flash crashes but reduce their duration.
Order-to-trade ratios and market liquidity Friederich, Sylvain; Payne, Richard
Journal of banking & finance,
January 2015, 2015-01-00, 20150101, Letnik:
50
Journal Article
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We study the impact on market liquidity of the introduction of a penalty for high order-to-trade ratios (OTRs), implemented by the Italian Stock Exchange to curtail high-frequency quote submission. ...We find that the fee is associated with a collapse in the quoted depth of the stocks that make up the bulk of trading in Italian equities and with an increase in price impacts of trading across the treated stocks. Spreads do not change, however. Stocks from a pan-European control sample show no such liquidity changes. Thus, the Italian OTR fee had the effect of making Italian stocks markets more shallow and less resilient. Large stocks are more severely affected than midcaps. We also find evidence of a limited decrease in turnover. Consolidated liquidity, constructed by aggregating across all electronic trading venues for these stocks, decreases just like that on the main exchange. Thus, liquidity was not simply diverted from the main exchange, it was reduced in aggregate.
Independent technological glitches forced two separate trading halts on different U.S. exchanges during the week of July 6, 2015. During each halt, all other exchanges remained open. We exploit ...exogenous variation provided by this unprecedented coincidence, in conjunction with a proprietary data set, to identify the causal impact of Designated Market Maker (DMM) participation on liquidity. When the voluntary liquidity providers on one exchange were removed, liquidity remained unchanged; when DMMs were removed, liquidity decreased market-wide. We find evidence consistent with the idea that these DMMs, despite facing only mild formal obligations, significantly improve liquidity in the modern electronic marketplace.
•Trading speed is crucially important for high-frequency trading based on U.S. macroeconomic news.•Annual losses due to being slow with 300ms (1second) can accumulate to 1.94% (3.90%.•The effect of ...algorithmic trading on market quality depends on the type of algorithm active.•Algorithmic activity increases depth at the best quotes, but decreases overall depth.•Algorithmic activity following a macroeconomic news arrival increases volatility.
This paper documents that speed is crucially important for high-frequency trading strategies based on U.S. macroeconomic news releases. Using order-level data on the highly liquid S&P 500 ETF traded on NASDAQ from January 6, 2009 to December 12, 2011, we find that a delay of 300ms or more significantly reduces returns of news-based trading strategies. This reduction is greater for high impact news and on days with high volatility. In addition, we assess the effect of algorithmic trading on market quality around macroeconomic news. In the minute following a macroeconomic news arrival, algorithmic activity increases trading volume and depth at the best quotes, but also increases volatility and leads to a drop in overall depth. Quoted half-spreads decrease (increase) when we measure algorithmic trading over the full (top of the) order book.
This work is devoted to the study of thermometric performances of Ndsup.3+ (0.1 or 0.5 mol.%), Ybsup.3+ (X%):YFsub.3 nanoparticles. Temperature sensitivity of spectral shape is related to the ...phonon-assisted nature of energy transfer (PAET) between Ndsup.3+ and Ybsup.3+). However, in the case of single-doped Ndsup.3+ (0.1 or 0.5 mol.%):YFsub.3 nanoparticles, luminescence decay time (LDT) of sup.4Fsub.3/2 level of Ndsup.3+ in Ndsup.3+ (0.5 mol.%):YFsub.3 decreases with the temperature decrease. In turn, luminescence decay time in Ndsup.3+ (0.1 mol.%):YFsub.3 sample remains constant. It was proposed, that at 0.5 mol.% the cross-relaxation (CR) between Ndsup.3+ ions takes place in contradistinction from 0.1 mol.% Ndsup.3+ concentration. The decrease of LDT with temperature is explained by the decrease of distances between Ndsup.3+ with temperature that leads to the increase of cross-relaxation efficiency. It was suggested, that the presence of both CR and PAET processes in the studied system (Ndsup.3+ (0.5 mol.%), Ybsup.3+ (X%):YFsub.3) nanoparticles provides higher temperature sensitivity compared to the systems having one process (Ndsup.3+ (0.1 mol.%), Ybsup.3+ (X%):YFsub.3). The experimental results confirmed this suggestion. The maximum relative temperature sensitivity was 0.9%·Ksup.−1 at 80 K.
We analyze the trading of corporate insiders at leading financial institutions during the 2007 to 2009 financial crisis. We find strong evidence of a relation between political connections and ...informed trading during the period in which Troubled Asset Relief Program (TARP) funds were disbursed, and that the relation is most pronounced among corporate insiders with recent direct connections. Notably, we find evidence of abnormal trading by politically connected insiders 30 days in advance of TARP infusions, and that these trades anticipate the market reaction to the infusion. Our results suggest that political connections can facilitate opportunistic behavior by corporate insiders.
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