The Competitive Landscape of High-Frequency Trading Firms
Forthcoming in the Review of Financial Studies
60 Pages Posted: 10 Mar 2016 Last revised: 10 Mar 2018
Date Written: September 13, 2017
We examine product differentiation in the high-frequency trading (HFT) industry, where the “products” are secretive proprietary trading strategies. We demonstrate how principal component analysis can be used to detect underlying strategies that are common to multiple HFT firms, and show that there are three product categories with distinct attributes. We study how HFT competition in each product category impacts the market environment, presenting evidence that indicates how it influences the short-horizon volatility of stocks as well as the viability of trading venues.
Keywords: high-frequency trading, HFT, competition, market microstructure, product market competition, trading strategies; product differentiation
JEL Classification: G10, L10
Suggested Citation: Suggested Citation