Multimarket High-Frequency Trading and Commonality in Liquidity
50 Pages Posted: 13 Jun 2017 Last revised: 17 Aug 2018
Date Written: July 22, 2017
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: Suggested Citation