Multimarket High-Frequency Trading and Commonality in Liquidity

50 Pages Posted: 13 Jun 2017 Last revised: 17 Aug 2018

See all articles by Olga Klein

Olga Klein

University of Warwick - Warwick Business School

Shiyun Song

University of Warwick - Warwick Business School

Date Written: July 22, 2017

Abstract

This paper examines the effects of multimarket high-frequency trading (HFT) activity on liquidity co-movements across different markets. Multimarket trading by HFTs connects individual markets in a single network, which should induce stronger network-wide liquidity co-movements. We use the staggered introduction of an alternative trading platform, Chi-X, in European equity markets as our instrument for an exogenous increase in multimarket HFT activity. Consistent with our predictions, we find that liquidity co-movements within the aggregate network of European markets significantly increase after the introduction of Chi-X and even exceed liquidity co-movements within the home market. They are especially strong in down markets and for stocks with a higher intensity of HFT trading in the post-Chi-X period.

Keywords: Multimarket trading, Commonality in Liquidity, Correlated Trading, Transaction Costs, European equities

JEL Classification: G10, G11, G12

Suggested Citation

Klein, Olga and Song, Shiyun, Multimarket High-Frequency Trading and Commonality in Liquidity (July 22, 2017). Available at SSRN: https://ssrn.com/abstract=2984887 or http://dx.doi.org/10.2139/ssrn.2984887

Olga Klein

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Shiyun Song (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

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