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The Diversity of High-Frequency Traders

56 Pages Posted: 27 Sep 2012 Last revised: 20 May 2013

Björn Hagströmer

Stockholm University - Stockholm Business School

Lars L. Norden

Stockholm University - Stockholm Business School

Date Written: May 18, 2013

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

Suggested Citation

Hagströmer, Björn and Norden, Lars L., The Diversity of High-Frequency Traders (May 18, 2013). Available at SSRN: https://ssrn.com/abstract=2153272 or http://dx.doi.org/10.2139/ssrn.2153272

Björn Hagströmer (Contact Author)

Stockholm University - Stockholm Business School ( email )

Stockholm
Sweden

Lars L. Nordén

Stockholm University - Stockholm Business School ( email )

Sweden

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