High-Frequency Trading and Market Performance

126 Pages Posted: 17 Oct 2015 Last revised: 1 May 2019

Date Written: April 29, 2019

Abstract

We study the consequences of high-frequency trading (HFT)—and potential policy responses—via the tradeoff between liquidity and information production. Faster speeds facilitate HFT with consequences for this tradeoff: information production diminishes because informed traders have less time to trade before HFTs react, but liquidity (measured by the bid-ask spread) improves because informational asymmetries decline. HFT also pushes outcomes inside the frontier of this tradeoff. However, outcomes can be restored to the frontier by replacing the limit order book with either of two alternative mechanisms: delaying all orders except cancellations or frequent batch auctions.

Keywords: high-frequency trading, order anticipation, quote fade, latency, information production, bid-ask spread, limit order book, non-cancellation delay, asymmetric delay, speed bump, frequent batch auctions

JEL Classification: D47, D82, G14, G18

Suggested Citation

Baldauf, Markus and Mollner, Joshua, High-Frequency Trading and Market Performance (April 29, 2019). Available at SSRN: https://ssrn.com/abstract=2674767 or http://dx.doi.org/10.2139/ssrn.2674767

Markus Baldauf

University of British Columbia (UBC) - Division of Finance ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Joshua Mollner (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2211 Campus Drive
Evanston, IL 60208
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
742
rank
32,315
Abstract Views
3,069
PlumX Metrics