High Frequency Trading in the Equity Markets During US Treasury POMO
32 Pages Posted: 16 Jul 2013 Last revised: 22 Feb 2018
Date Written: January 1, 2018
We analyze high frequency trading (HFT) activity in equities during U.S. Treasury permanent open market (POMO) purchases by the Federal Reserve. We construct a model to study HFT quote and trade behavior when private information is released and confirm it empirically. We estimate that HFT firms reduce their inside quote participation by up to 8% during POMO auctions. HFT firms trade more aggressively, and they supply less passive liquidity to non-HFT firms. Market impact also rises during Treasury POMO. Aggressive HFT trading becomes more consistently profitable, and HFT firms earn a higher return per share. We also estimate that HFT firms earn profits of over $105 million during U.S. Treasury POMO events.
Keywords: high frequency trading, Federal Reserve, open market operations, private information
JEL Classification: G12, G21, G24
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