High Frequency Trading, Market Volatility and Trading Counterparty Performance

36 Pages Posted: 23 Aug 2016 Last revised: 7 Dec 2016

See all articles by P. Joakim Westerholm

P. Joakim Westerholm

University of Sydney Business School; Financial Research Network (FIRN)

Date Written: December 6, 2016

Abstract

The findings in this paper confirm that there is an economic and statistic negative association between High Frequency Trading [HFT] activity and price volatility. In the ultra-high frequency intervals around HFT there is a slight increase in volatility. This paper also confirms that large high frequency traders make consistently profitable trades intra-day, but their performance is also highly impacted by the overnight positions they hold. The counterparties of high frequency traders are found to endure significant and consistent short term costs. Most HFT occur within the category of high frequency traders, other common counterparties are buy side institutional investors and financial firms, typically not households. The bulk of the large short term returns earned by the largest HFT firms are generated from trading with other smaller HFTs and slower intermediaries. I suggest that the relatively moderate costs suffered by institutional counterparties to HFT, may be justified as a compensation for liquidity and fast execution.

Keywords: high frequency trading, counterparty performance

JEL Classification: G10, G23

Suggested Citation

Westerholm, P. Joakim, High Frequency Trading, Market Volatility and Trading Counterparty Performance (December 6, 2016). 29th Australasian Finance and Banking Conference 2016. Available at SSRN: https://ssrn.com/abstract=2826621 or http://dx.doi.org/10.2139/ssrn.2826621

P. Joakim Westerholm (Contact Author)

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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