Competition among High-Frequency Traders, and Market Quality
NYU Stern Microstructure Meeting 2013
53 Pages Posted: 14 May 2013 Last revised: 21 Apr 2020
Date Written: April 20, 2020
I study empirically how competition among high-frequency traders (HFTs) affects their trading behavior and market quality. The analysis exploits a unique dataset, which allows comparing environments with and without high-frequency competition, and contains an exogenous event - a tick size reform - which I use to separate the effects of high-frequency trading competition from the effects of the rising share of high-frequency trading in the market. I find that when HFTs compete, their speculative trading increases. As a result, market liquidity deteriorates and short-term volatility rises. My findings hold for a variety of market quality and high-frequency trading behavior measures.
Keywords: high-frequency trading, competition, high-frequency trading strategies, tick size reform
JEL Classification: G12, G14, G15, G18, G23, D4, D61
Suggested Citation: Suggested Citation