Are High-Frequency Traders Anticipating the Order Flow? Cross-Venue Evidence from the UK Market

39 Pages Posted: 9 Mar 2017 Last revised: 5 Apr 2017

See all articles by Matteo Aquilina

Matteo Aquilina

Financial Conduct Authority

Carla Ysusi

Financial Conduct Authority

Date Written: April 21, 2016

Abstract

Allegations have been made that High Frequency Traders (HFTs) prey on other market participants and only intermediate trades that would have taken place without their involvement. There are claims that HFTs can predict when orders are going to arrive at different trading venues and trade in advance of slower traders by exploiting their speed advantage. In this paper, we investigate whether there is evidence that this behaviour is taking place on a systematic basis in the UK. We use a novel dataset with full order-book data on 120 stocks traded on lit venues in the UK for the year 2013. We investigate two related questions. Firstly, whether HFTs exploit their small (milliseconds) latency advantages to anticipate orders arriving in very quick succession at different trading venues from other market participants. Secondly, whether HFTs can anticipate the order flow over longer timeframes (seconds or tens of seconds). We do not find evidence that the first behaviour is occurring systematically: there is no evidence in our sample that HFTs can “see the true market” and trade in front of other participants at a millisecond frequency. We do find patterns consistent with HFTs being able to anticipate the order flow over longer time periods (seconds and tens of seconds). However, we cannot say whether this is due to HFTs reacting more rapidly to new information or to order-flow anticipation.

Keywords: High frequency trading, order anticipation, market microstructure

JEL Classification: G14, G18, L1

Suggested Citation

Aquilina, Matteo and Ysusi, Carla, Are High-Frequency Traders Anticipating the Order Flow? Cross-Venue Evidence from the UK Market (April 21, 2016). FCA Occasional Paper No. 16. Available at SSRN: https://ssrn.com/abstract=2841830

Matteo Aquilina (Contact Author)

Financial Conduct Authority ( email )

25 The North Colonnade
Canary Wharf
London, E14 5HS
United Kingdom

Carla Ysusi

Financial Conduct Authority ( email )

25 The North Colonnade
Canary Wharf
London, E14 5HS
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
142
Abstract Views
748
rank
201,885
PlumX Metrics