An Examination of the Strategic Behavior of High-Frequency Traders (HFTs)

Project Start:01/2016
Researchers:Loriana Pelizzon, Ryan Riordan, Satchit Sagade, Marti Subrahmanyam, Jun Uno, Jan Viebig, Christian Westheide
Category: Financial Markets, Systemic Risk Lab
Funded by:LOEWE

Part One: According to the ESMA Economic Report by Bouveret et al. (2014), HFT constitutes 24-43% of trading in European lit equity markets. Current empirical literature on HFT has predominantly studied their behaviour in a single market, such as Nasdaq. The results from Bouveret et al. (2014) show that HFTs’ market share differ markedly between exchanges. It is also clear that several HFT strategies are employed in multiple markets, which makes the examination of HFT on a single exchange problematic. Many HFTs are active on multiple exchanges, and for stocks that are traded in multiple markets, these HFTs are active in trading the same stocks on multiple markets. We will study a variety of questions that form useful additions to the academic literature as well as ESMA’s policy agenda. Access to data spanning multiple venues will allow us to better capture the intraday level and changes to HFTs’ inventories, thereby enabling us to examine the impact of their inventory management policies on market prices. We will examine HFTs’ role in absorbing supply and demand imbalances across exchanges to ensure that prices in multiple markets are aligned. This question is important because of possible price dislocations that can occur if investors try and trade large amounts of stock in only one market when liquidity is fragmented. Part Two: We propose to examine the strategic behaviour of HFTs during market pre-opening. The market opening serves an important function of stock markets. The information accumulated overnight and the concentration of orders affects the price formation in anticipation of, and at, the market opening. A key question we ask in this research is whether high frequency quote revisions that occur during the pre-opening period amplify noise or lead to an improvement in the price formation. The purpose of disseminating pre-opening quotes is to provide a good indication of the day’s opening price. However, the pre-opening quote information may still be noisy for several reasons. The noise effects may prevail up to the final seconds in the pre-opening period. Finding better market rules and the effects of market competition may help market venues and regulatory bodies to improve institutional settings.

Related Working Papers

No.Author/sTitleYearProgram AreaKeywords
144Mario Bellia, Loriana Pelizzon, Marti Subrahmanyam, Jun Uno, Darya YuferovaLow-Latency Trading and Price Discovery: Evidence from the Tokyo Stock Exchange in the Pre-Opening and Opening Periods2016 Financial Markets, Systemic Risk Lab High-Frequency Traders (HFTs), Pre-Opening, Opening Call Auction, Price Discovery, Liquidity provision.