High-Frequency Trading Competition

Journal of Financial and Quantitative Analysis (2019), Vol. 54, No. 4

46 Pages Posted: 13 May 2014 Last revised: 15 Aug 2019

See all articles by Jonathan Brogaard

Jonathan Brogaard

University of Utah - David Eccles School of Business

Corey Garriott

TMX Group

Date Written: February 16, 2018

Abstract

Theory on high-frequency traders (HFT) predicts that market liquidity for a security decreases in the number of HFT trading the security. We test this prediction by studying a new Canadian stock exchange, Alpha, that experienced the entry of 11 HFT firms over four years. Bid-ask spreads on Alpha converge to those at the Toronto Stock Exchange as more HFT trade on Alpha. Effective and realized spreads for nonHFT improve as HFT firms enter the market. To explain the contrast with theory, which models HFT as a price competitor, we provide evidence more consistent with HFT fitting a quantity competitor framework.

Keywords: high-frequency trading, competition, industrial organization

JEL Classification: G20, G14, L10

Suggested Citation

Brogaard, Jonathan and Garriott, Corey, High-Frequency Trading Competition (February 16, 2018). Journal of Financial and Quantitative Analysis (2019), Vol. 54, No. 4, Available at SSRN: https://ssrn.com/abstract=2435999 or http://dx.doi.org/10.2139/ssrn.2435999

Jonathan Brogaard

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

HOME PAGE: http://www.jonathanbrogaard.com

Corey Garriott (Contact Author)

TMX Group ( email )

130 King St W
Toronto, Ontario M5X 2A2
Canada

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