The Effects of High Frequency Traders in a Simulated Market
Thomas A. Hanson
Kent State University - Department of Finance
August 28, 2011
Midwest Finance Association 2012 Annual Meetings Paper
High frequency trading (HFT) is the latest revolutionary force in financial markets, but good empirical data is notoriously difficult to obtain and analyze. To provide some basic insights into the effects of HFT on stock markets, this paper employs an agent-based simulation to examine the influence of a simple HFT strategy in a continuous double auction market. In the simulated market environment, market liquidity, efficiency, and total surplus each varied directly with the number of traders employing the HFT strategy, thereby strengthening the arguments of some proponents of HFT. However, results supported that market volatility increased with the number of HF traders, and the profits of those traders may come at the expense of long-term oriented investors. These findings may justify some of the concerns of regulators. The simulation setting helps isolate the effect of HFT, and the results bear further testing and validation in empirical markets.
Number of Pages in PDF File: 26
Keywords: high frequency trading, agent-based simulation, market efficiency, price volatility, regulationworking papers series
Date posted: September 15, 2011
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