High-Frequency Trading Competition
Journal of Financial and Quantitative Analysis (2019), Vol. 54, No. 4
46 Pages Posted: 13 May 2014 Last revised: 15 Aug 2019
Date Written: February 16, 2018
Theory on high-frequency traders (HFT) predicts that market liquidity for a security decreases in the number of HFT trading the security. We test this prediction by studying a new Canadian stock exchange, Alpha, that experienced the entry of 11 HFT firms over four years. Bid-ask spreads on Alpha converge to those at the Toronto Stock Exchange as more HFT trade on Alpha. Effective and realized spreads for nonHFT improve as HFT firms enter the market. To explain the contrast with theory, which models HFT as a price competitor, we provide evidence more consistent with HFT fitting a quantity competitor framework.
Keywords: high-frequency trading, competition, industrial organization
JEL Classification: G20, G14, L10
Suggested Citation: Suggested Citation