Does High-Frequency Trading Increase Systemic Risk?

44 Pages Posted: 31 Jul 2016

See all articles by Pankaj K. Jain

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics

Pawan Jain

University of Wyoming - College of Business - Department of Economics and Finance; Central Michigan University

Thomas H. McInish

University of Memphis - Fogelman College of Business and Economics

Date Written: July 29, 2016

Abstract

In 2010, the Tokyo Stock Exchange, the largest stock exchange headquartered outside of the United States, introduced a new trading platform, Arrowhead. This platform was designed to reduce latency and increase co-located, high-frequency quoting and trading (HFQ) from zero to 36% of trading volume. During tail events representing extreme market conditions, low-latency correlated HFQ may lead to systemic risks such as flash crashes, which has not been sufficiently addressed in the literature. In this paper, our study provides a framework to assess whether HFQ increases systemic risks and point to the need for incorporating correlations and CoVaR methods in regulating these risks through circuit breakers and other regulations.

Keywords: High-frequency trading, Liquidity, Correlation, Systemic Risk, Arrowhead, CoVaR

JEL Classification: D53, G12, G14, G15

Suggested Citation

Jain, Pankaj K. and Jain, Pawan and McInish, Thomas H., Does High-Frequency Trading Increase Systemic Risk? (July 29, 2016). Journal of Financial Markets, 2016. Available at SSRN: https://ssrn.com/abstract=2816202 or http://dx.doi.org/10.2139/ssrn.2816202

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States

Pawan Jain (Contact Author)

University of Wyoming - College of Business - Department of Economics and Finance ( email )

P.O. Box 3985
Laramie, WY 82071-3985
United States

Central Michigan University ( email )

Mt. Pleasant, MI 48858
United States

Thomas H. McInish

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States
901-678-4662 (Phone)
901-678-3006 (Fax)

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