High-Frequency Trading as Viewed Through an Electron Microscope

18 Pages Posted: 28 Nov 2016 Last revised: 27 May 2017

Albert J. Menkveld

VU University Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Date Written: May 8, 2017

Abstract

The electron microscope improved our vision by a factor of one million. Humans could finally see atoms. This study aims for a similar leap by studying trades at nanoseconds, a million times more precise than often used milliseconds. This enables one to observe asset re-allocations among rapid-fire tradebots, including those employed by high-frequency traders (HFTs). Twenty percent of trades arrive in sub-millisecond clusters. Importantly, these clusters do not seem to feature price instability. However, they are costly to nonHFTs in terms of adverse selection, but they can be avoided.

Keywords: HFT, nanoseconds, price instability

JEL Classification: G10

Suggested Citation

Menkveld, Albert J., High-Frequency Trading as Viewed Through an Electron Microscope (May 8, 2017). Financial Analysts Journal, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2875612

Albert J. Menkveld (Contact Author)

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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