Risk and Return in High-Frequency Trading

82 Pages Posted: 6 May 2014 Last revised: 10 Jan 2018

Matthew Baron

Cornell University - Samuel Curtis Johnson Graduate School of Management

Jonathan Brogaard

University of Utah - David Eccles School of Business

Björn Hagströmer

Stockholm University - Stockholm Business School

Andrei A. Kirilenko

Imperial College London - Centre for Global Finance and Technology

Date Written: November 14, 2017

Abstract

We study performance and competition among high-frequency traders (HFTs). We construct measures of latency and find that differences in relative latency account for large differences in HFTs’ trading performance. HFTs that improve their latency rank due to colocation upgrades see improved trading performance. The stronger performance associated with speed comes through both the short-lived information channel and the risk management channel, and speed is useful for various strategies including market making and cross-market arbitrage. We find empirical support for many predictions regarding relative latency competition.

Keywords: high-frequency trading, low latency, market microstructure

JEL Classification: G10, G19

Suggested Citation

Baron, Matthew and Brogaard, Jonathan and Hagströmer, Björn and Kirilenko, Andrei A., Risk and Return in High-Frequency Trading (November 14, 2017). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2433118 or http://dx.doi.org/10.2139/ssrn.2433118

Matthew Baron (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Jonathan Brogaard

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

HOME PAGE: http://www.jonathanbrogaard.com

Björn Hagströmer

Stockholm University - Stockholm Business School ( email )

Stockholm
Sweden

Andrei A. Kirilenko

Imperial College London - Centre for Global Finance and Technology ( email )

South Kensington Campus
London, SW7 2AZ
United Kingdom

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