High Frequency Trading in the Equity Markets During US Treasury POMO

32 Pages Posted: 16 Jul 2013 Last revised: 22 Feb 2018

See all articles by Cheng Gao

Cheng Gao

Rutgers University, Department of Economics

Bruce Mizrach

Rutgers University, Department of Economics

Date Written: January 1, 2018

Abstract

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

Suggested Citation

Gao, Cheng and Mizrach, Bruce, High Frequency Trading in the Equity Markets During US Treasury POMO (January 1, 2018). Available at SSRN: https://ssrn.com/abstract=2294038 or http://dx.doi.org/10.2139/ssrn.2294038

Cheng Gao

Rutgers University, Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

Bruce Mizrach (Contact Author)

Rutgers University, Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States
(848) 932-8636 (Phone)
(732) 932-7416 (Fax)

HOME PAGE: http://snde.rutgers.edu/

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