High-Frequency Trading and Market Stability

53 Pages Posted: 4 Dec 2015 Last revised: 7 Apr 2016

See all articles by Dion Bongaerts

Dion Bongaerts

Erasmus University Rotterdam (EUR) - Finance

Mark Van Achter

Erasmus University Rotterdam (EUR) - Finance

Date Written: March 30, 2016

Abstract

We analyze how liquidity provision by high-frequency traders (HFTs) affects market stability, echoing recent regulatory concerns. Our model features a limit order market with informed trading and endogenous entry and exit. Liquidity is provided by traditional liquidity providers and HFTs with superior speed and/or information processing technology. Speed technology by itself leads to efficient resource allocation and maximizes liquidity. Information processing technology by itself generates mild inefficiencies due to a lemons problem. Yet, the combination of the two can lead to the implementation of inefficient speed technology, oligopolistic rents, or an amplified lemons problem with occasional market freezes.

Keywords: Market Freeze, Liquidity Dry-Up, Systemic Risk, Latency, Informed Trading, Allocative Efficiency

JEL Classification: D53, G01, G10, G18

Suggested Citation

Bongaerts, Dion and Van Achter, Mark, High-Frequency Trading and Market Stability (March 30, 2016). Available at SSRN: https://ssrn.com/abstract=2698702 or http://dx.doi.org/10.2139/ssrn.2698702

Dion Bongaerts (Contact Author)

Erasmus University Rotterdam (EUR) - Finance ( email )

Burgemeester Oudlaan 50
Rotterdam, 3062PA
Netherlands
+31 (0) 10 40 82 790 (Phone)
+31 (0) 10 40 89 017 (Fax)

HOME PAGE: http://www.rsm.nl/portal/page/portal/home/faculty/academic_departments/finance/faculty_and_staff/fac

Mark Van Achter

Erasmus University Rotterdam (EUR) - Finance ( email )

Burgemeester Oudlaan 50
P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 40 82 953 (Phone)
+31 10 40 89 017 (Fax)

HOME PAGE: http://www.rsm.nl/mvanachter

Register to save articles to
your library

Register

Paper statistics

Downloads
372
Abstract Views
1,376
rank
78,154
PlumX Metrics