Very Fast Money: High-Frequency Trading on the NASDAQ
August 2, 2012
I provide large-sample evidence regarding High-frequency Trading (HFT) strategies and market quality, using a proprietary sample of NASDAQ trades and quotes that identifies HFT participation. Spreads are slightly wider for trades where HFTs provide liquidity and slightly tighter when HFTs take liquidity, suggesting that HFTs provide liquidity when it is scarce and consume liquidity when plentiful. Prices incorporate information from order flow and market-wide returns more efficiently on days when HFT participation is high. This effect is driven by HFT demand-side participation, implying that HFTs improve price efficiency when demanding liquidity. I also provide evidence regarding HFT trading strategies, showing that HFTs engage in successful intra-day market timing, but do not seem to trade on cross-sectional return predictability at the horizons I study. The new evidence in this paper is relevant to the ongoing HFT-related policy debates and can potentially provide guidance to theoretical researchers seeking to model HFT behavior and market quality impacts.
Number of Pages in PDF File: 71
Keywords: high frequency trading, market quality, liquidity, market efficiency, trading performance
JEL Classification: G1, G2working papers series
Date posted: August 2, 2012
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