Ultra-Fast Activity and Intraday Market Quality

61 Pages Posted: 11 Jun 2015 Last revised: 11 Dec 2018

See all articles by Álvaro Cartea

Álvaro Cartea

University of Oxford; University of Oxford - Oxford-Man Institute of Quantitative Finance

Richard Payne

City University London - Sir John Cass Business School

José Penalva

Universidad Carlos III, Madrid - Business Economics Department

Mikel Tapia

Universidad Carlos III de Madrid - Department of Business Administration

Date Written: December 10, 2018

Abstract

This paper studies the intraday relationship between ultra-fast machine-driven activity (UFA) and market quality in automated equity markets. We find that higher UFA is associated with lower intraday market quality (greater quoted and effective spreads and lower depth). This effect is economically significant, and robust to different specifications, endogeneity tests, and alternative measures of UFA. Our results hold after controlling for volatility, periods of unusually high UFA (a proxy for quote stuffing), and periods where UFA is primarily driven by fleeting orders inside the spread (a proxy for spoofing and competition between liquidity providers).

Keywords: High Frequency Trading, HFT, Algorithmic Trading, Market Quality, Low Latency

JEL Classification: G10, O33

Suggested Citation

Cartea, Álvaro and Payne, Richard G. and Penalva, José and Tapia, Mikel, Ultra-Fast Activity and Intraday Market Quality (December 10, 2018). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2616627 or http://dx.doi.org/10.2139/ssrn.2616627

Álvaro Cartea (Contact Author)

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

Richard G. Payne

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

José Penalva

Universidad Carlos III, Madrid - Business Economics Department ( email )

Calle Madrid 126
Getafe, 28903
Spain

Mikel Tapia

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain

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