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High Frequency Trading and End-of-Day Price Dislocation

52 Pages Posted: 12 Sep 2012 Last revised: 22 Nov 2013

Douglas J. Cumming

York University - Schulich School of Business

Feng Zhan

John Carroll University - Boler School of Business

Michael J. Aitken

Macquarie Graduate School of Management

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Date Written: October 28, 2013

Abstract

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.

Keywords: High frequency trading, End-of-day price dislocation, Manipulation, Trading rules, Surveillance, Law and finance

JEL Classification: G12, G14, G18, K22

Suggested Citation

Cumming, Douglas J. and Zhan, Feng and Aitken, Michael J., High Frequency Trading and End-of-Day Price Dislocation (October 28, 2013). Available at SSRN: https://ssrn.com/abstract=2145565 or http://dx.doi.org/10.2139/ssrn.2145565

Douglas Cumming

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

HOME PAGE: http://booksite.elsevier.com/9780124095373/

Feng Zhan (Contact Author)

John Carroll University - Boler School of Business ( email )

University Heights, OH 44118-4581
United States

Michael Aitken

Macquarie Graduate School of Management ( email )

North Ryde
Sydney, New South Wales 2109
Australia

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