High Frequency Quoting, Trading, and the Efficiency of Prices

49 Pages Posted: 19 Nov 2013 Last revised: 15 Nov 2014

See all articles by Jennifer S. Conrad

Jennifer S. Conrad

University of North Carolina Kenan-Flagler Business School

Sunil Wahal

Arizona State University (ASU) - Finance Department

Jin Xiang

Integrated Financial Engineering Inc.

Date Written: November 14, 2014

Abstract

We examine the relation between high frequency quotation and the behavior of stock prices between 2009 and 2011 for the full cross-section of securities in the U.S. On average, higher quotation activity is associated with price series that more closely resemble a random walk, and significantly lower cost of trading. We also explore market resiliency during periods of exceptionally high low-latency trading: large liquidity drawdowns in which, within the same millisecond, trading algorithms systematically sweep large volume across multiple trading venues. Although such large drawdowns incur trading costs, they do not appear to degrade the price formation process or increase the subsequent cost of trading. In an out-of-sample analysis, we investigate an exogenous technological change to the trading environment on the Tokyo Stock Exchange that dramatically reduces latency and allows co-location of servers. This shock also results in prices more closely resembling a random walk, and a sharp decline in the cost of trading.

Keywords: High Frequency Trading, Market Microstructure

Suggested Citation

Conrad, Jennifer S. and Wahal, Sunil and Xiang, Jin, High Frequency Quoting, Trading, and the Efficiency of Prices (November 14, 2014). Journal of Financial Economics (JFE), Forthcoming; UNC Kenan-Flagler Research Paper No. 2357122. Available at SSRN: https://ssrn.com/abstract=2357122 or http://dx.doi.org/10.2139/ssrn.2357122

Jennifer S. Conrad

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Sunil Wahal (Contact Author)

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Jin Xiang

Integrated Financial Engineering Inc. ( email )

51 Monroe Pl, Suite 1100
Rockville, MD 20850
United States
3013096560 (Phone)

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