Trade Size, High Frequency Trading, and Co-Location Around the World

European Journal of Finance, Forthcoming

37 Pages Posted: 7 Nov 2012 Last revised: 20 Nov 2014

See all articles by Michael J. Aitken

Michael J. Aitken

Macquarie Graduate School of Management

Douglas J. Cumming

Florida Atlantic University; Birmingham Business School; European Corporate Governance Institute (ECGI)

Feng Zhan

Western University

Date Written: March 14, 2014

Abstract

We examine the impact of changes in market microstructure, particularly algorithmic trading (AT) and high frequency trading (HFT), on trade size across 24 stock exchanges around the world. Using colocation services as a proxy for AT and HFT, we find mixed results on the impact of AT and HFT on the average trade size. Furthermore, we test whether the presence of HFT leads to the introduction of colocation services. The data are consistent with the view that HFT pre-dates colocation by at least 8 months on most exchanges, and has strong power in explaining the introduction of colocation services. In effect, our results show that colocation services do not properly measure effective AT and HFT; rather, colocation services are the result of HFT. Exchanges choose to offer colocation services due to the fact HFT requires higher speed transactions. Finally, we show there have been substantial changes in trade size in other countries such as China where there is no HFT, and offer explanations for these changes and suggest avenues for future research.

Keywords: Trade size, High frequency trading, Co-location, International market microstructure

JEL Classification: G12, G14, G18

Suggested Citation

Aitken, Michael J. and Cumming, Douglas J. and Zhan, Feng, Trade Size, High Frequency Trading, and Co-Location Around the World (March 14, 2014). European Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2172455 or http://dx.doi.org/10.2139/ssrn.2172455

Michael J. Aitken (Contact Author)

Macquarie Graduate School of Management ( email )

North Ryde
Sydney, New South Wales 2109
Australia

Douglas J. Cumming

Florida Atlantic University ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

HOME PAGE: http://sites.google.com/view/douglascumming/bio?authuser=0

Birmingham Business School ( email )

Edgbaston Park Road
Birmingham, B15 2TY
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://https://ecgi.global/users/douglas-cumming

Feng Zhan

Western University ( email )

1151 Richmond St
London, N6A 3K7
Canada

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