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
Date Written: April 21, 2016
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: Suggested Citation