New York University (NYU) - Department of Finance
Cornell University - Samuel Curtis Johnson Graduate School of Management
May 22, 2013
Johnson School Research Paper Series No. 35-2010
AFA 2012 Chicago Meetings Paper
We define low-latency activity as strategies that respond to market events in the millisecond environment, the hallmark of proprietary trading by high-frequency trading firms. We propose a new measure of low-latency activity that can be constructed from publicly-available NASDAQ data to investigate the impact of high-frequency trading on the market environment. Our measure is highly correlated with NASDAQ-constructed estimates of high-frequency trading, but it can be computed from data that are more widely-available. We use this measure to study how low-latency activity affects market quality both during normal market conditions and during a period of declining prices and heightened economic uncertainty. Our conclusion is that increased low-latency activity improves traditional market quality measures — lowering short-term volatility, decreasing spreads, and increasing displayed depth in the limit order book. Of particular importance is that our findings suggest that increased low-latency activity need not work to the detriment of long-term investors in the current market structure for U.S. equities.
Number of Pages in PDF File: 56
Keywords: low latency, high frequency trading, HFT, market quality, algorithmic trading, algorithms
JEL Classification: G10, O33working papers series
Date posted: October 22, 2010 ; Last revised: May 22, 2013
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