How High Frequency Trading Affects a Market Index

Scientific Reports 3, Article number: 2110

8 Pages Posted: 4 Jul 2013

See all articles by Dror Y. Kenett

Dror Y. Kenett

Financial Industry Regulatory Authority (FINRA); Johns Hopkins University

Eshel Ben-Jacob

Tel Aviv University (Deceased)

H. Eugene Stanley

Boston University - Center for Polymer Studies

Gitit Gur-Gershgoren

Israel Securities Authority; Gitit Gur Gershgoren

Date Written: July 2, 2013

Abstract

The relationship between a market index and its constituent stocks is complicated. While an index is a weighted average of its constituent stocks, when the investigated time scale is one day or longer the index has been found to have a stronger effect on the stocks than vice versa. We explore how this interaction changes in short time scales using high frequency data. Using a correlation-based analysis approach, we find that in short time scales stocks have a stronger influence on the index. These findings have implications for high frequency trading and suggest that the price of an index should be published on shorter time scales, as close as possible to those of the actual transaction time scale.

Keywords: HFT, market microstructure, correlation, econophysics

Suggested Citation

Kenett, Dror Y. and Ben-Jacob, Eshel and Stanley, H. Eugene and Gur-Gershgoren, Gitit, How High Frequency Trading Affects a Market Index (July 2, 2013). Scientific Reports 3, Article number: 2110 , Available at SSRN: https://ssrn.com/abstract=2289674

Dror Y. Kenett (Contact Author)

Financial Industry Regulatory Authority (FINRA) ( email )

Washington, DC
United States

Johns Hopkins University ( email )

Baltimore, MD 20036-1984
United States

Eshel Ben-Jacob

Tel Aviv University (Deceased)

H. Eugene Stanley

Boston University - Center for Polymer Studies ( email )

Boston, MA 02215
United States

Gitit Gur-Gershgoren

Israel Securities Authority ( email )

22 Kanfei Nesharim Street
Jerusalem 95464
Israel

Gitit Gur Gershgoren ( email )

Tzahal Street 104
Kiryat Ono, 55000
Israel

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