High Frequency Trading and End-of-Day Price Dislocation
Douglas J. Cumming
York University - Schulich School of Business
Boler School of Business, John Carroll University
Michael J. Aitken
University of New South Wales (UNSW) - School of Banking and Finance; Centre for International Finance and Regulation (CIFR); Financial Research Network (FIRN)
October 28, 2013
We show that the presence of high frequency trading (HFT) has significantly mitigated the frequency and severity of end-of-day price dislocation, counter to recent concerns expressed in the media. The effect of HFT is more pronounced on days when end of day price dislocation is more likely to be the result of market manipulation on days of option expiry dates and end of month. Moreover, the effect of HFT is more pronounced than the role of trading rules, surveillance, enforcement and legal conditions in curtailing the frequency and severity of end-of-day price dislocation. We show our findings are robust to different proxies of the start of HFT by trade size, cancellation of orders, and co-location.
Number of Pages in PDF File: 52
Keywords: High frequency trading, End-of-day price dislocation, Manipulation, Trading rules, Surveillance, Law and finance
JEL Classification: G12, G14, G18, K22working papers series
Date posted: September 12, 2012 ; Last revised: November 22, 2013
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