Competition between High-Frequency Traders, and Market Quality
Johannes H. Breckenfelder
European Central Bank (ECB) - Financial Research
November 1, 2013
NYU Stern Microstructure Meeting 2013
This is the first empirical evidence on the competition between high-frequency traders (HFTs) and its influence on market quality. We exploit the first entries of international HFTs into the Swedish equity market in 2009 and conduct a difference-in-differences analysis using trade-by-trade data. To further identify the effect, we use the Federation of European Securities Exchanges (FESE) tick size harmonization as an exogenous event that caused HFTs to start trading in stocks. When HFTs compete for trades their liquidity consumption increases. As a result, liquidity deteriorates significantly and short-term volatility rises.
Number of Pages in PDF File: 61
Keywords: competition, high-frequency trading, tick size harmonization, FESE, entry, exit
JEL Classification: G12, G14, G15, G18, G23, D4, D61
Date posted: May 14, 2013 ; Last revised: December 4, 2013
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