Does Speed Matter? The Role of High-Frequency Trading for Order Book Resiliency

38 Pages Posted: 8 May 2015 Last revised: 3 Apr 2017

Benjamin Clapham

Goethe University Frankfurt Faculty of Economics and Business Administration

Martin Haferkorn

Goethe University Frankfurt Faculty of Economics and Business Administration

Kai Zimmermann

Goethe University Frankfurt Faculty of Economics and Business Administration

Date Written: April 03, 2017

Abstract

This paper explores limit order book resiliency following liquidity shocks in the presence of high-frequency traders. Based on a unique data set that enables the identification of orders submitted by algorithms and subscribers of co-location services, we study whether high-frequency traders are involved in the replenishment of the order book. We analyze order submission and deletion activity before and after liquidity shocks initiated by large market orders. Our results show that exclusively high-frequency traders reduce the spread within the first seconds after the liquidity shock making use of their speed advantage. However, liquidity recovery in terms of order book depth takes significantly longer and is accomplished by human traders' submission activity only.

Keywords: High-Frequency Trading, Liquidity, Resiliency, Securities Markets, Market Quality

JEL Classification: G14, G15, G18, G28

Suggested Citation

Clapham, Benjamin and Haferkorn, Martin and Zimmermann, Kai, Does Speed Matter? The Role of High-Frequency Trading for Order Book Resiliency (April 03, 2017). Paris December 2015 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=2603205 or http://dx.doi.org/10.2139/ssrn.2603205

Benjamin Clapham

Goethe University Frankfurt Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 4
Frankfurt am Main, 60323
Germany

Martin Haferkorn (Contact Author)

Goethe University Frankfurt Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 4
Frankfurt am Main, 60323
Germany

Kai Zimmermann

Goethe University Frankfurt Faculty of Economics and Business Administration ( email )

Grueneburgplatz 1
Frankfurt am Main, 60323
Germany

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