High Frequency Trading and Co-Movement in Financial Markets

50 Pages Posted: 23 Aug 2016 Last revised: 11 Feb 2019

See all articles by Laura Malceniece

Laura Malceniece

Stockholm School of Economics, Riga

Kārlis Malcenieks

Stockholm School of Economics, Riga

Tālis J. Putniņš

University of Technology Sydney (UTS); Stockholm School of Economics, Riga

Date Written: March 23, 2018

Abstract

Using the staggered entry of Chi-X in 12 European equity markets as a source of exogenous variation in high frequency trading (HFT), we find that HFT causes significant increases in co-movement in returns and in liquidity. About one-third of the increase in return co-movement is due to faster diffusion of market-wide information. We attribute the remaining two-thirds to correlated trading strategies of HFTs. The increase in liquidity co-movement is consistent with HFT liquidity providers being better able to monitor other stocks and adjust their liquidity provision accordingly. Our findings suggest a channel by which HFT impacts the cost of capital.

Keywords: high frequency trading, HFT, co-movement, commonality, synchronicity, liquidity

JEL Classification: G14, G12

Suggested Citation

Malceniece, Laura and Malcenieks, Kārlis and Putnins, Talis J., High Frequency Trading and Co-Movement in Financial Markets (March 23, 2018). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2827148 or http://dx.doi.org/10.2139/ssrn.2827148

Laura Malceniece

Stockholm School of Economics, Riga ( email )

Strelnieku iela 4a
Riga, LV 1010
Latvia

Kārlis Malcenieks

Stockholm School of Economics, Riga ( email )

Strelnieku iela 4a
Riga, LV 1010
Latvia

Talis J. Putnins (Contact Author)

University of Technology Sydney (UTS) ( email )

PO Box 123
Broadway
Sydney
Australia
+61 2 9514 3088 (Phone)

Stockholm School of Economics, Riga ( email )

Strelnieku iela 4a
Riga, LV 1010
Latvia
+371 67015841 (Phone)

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