The Diversity of High-Frequency Traders

Abstract

The regulatory debate concerning high-frequency trading (HFT) emphasizes the importance of distinguishing different HFT strategies and their influence on market quality. Using data from NASDAQ-OMX Stockholm, we compare market-making HFTs to opportunistic HFTs. We find that market makers constitute the lion’s share of HFT trading volume (65-71%) and limit order traffic (81-86%). Furthermore, market makers have higher order-to-trade ratios and lower latency than opportunistic HFTs. In a natural experiment based on tick size changes, we find that the activity of market-making HFTs mitigates intraday price volatility.

Keywords: High-frequency trading, Market making, Market quality, Volatility, order-to-trade ratio

JEL Classification: G14, G18