High‐Frequency Traders and Market Structure
12 Pages Posted: 8 Apr 2014
Date Written: May 2014
The arrival of high‐frequency traders (HFTs) coincided with the entry of new markets and, subsequently, strong fragmentation of the order flow. These trends might be related as new markets serve HFTs who seek low fees and high speed. New markets only thrive on competitive price quotes that well‐connected HFTs can deliver as they can offload any nonzero position in any market they are connected to. HFTs may benefit or hurt market quality through adverse selection on price quotes, a technology arms race, or high‐risk trading strategies.
Keywords: high‐frequency traders, market fragmentation, market structure
JEL Classification: G10
Suggested Citation: Suggested Citation