The Ambivalent Role of High-Frequency Trading in Turbulent Market Periods

61 Pages Posted: 23 Aug 2017 Last revised: 28 Sep 2017

See all articles by Nikolaus Hautsch

Nikolaus Hautsch

University of Vienna - Department of Statistics and Operations Research; Center for Financial Studies (CFS)

Michael Noé

Eurex Frankfurt AG - Derivatives Market Design; Humboldt University of Berlin - School of Business and Economics

S. Sarah Zhang

University of Manchester - Alliance Manchester Business School

Date Written: August 16, 2017

Abstract

We show an ambivalent role of high-frequency traders (HFTs) in the Eurex Bund Futures market around high-impact macroeconomic announcements and extreme events. Around macroeconomic announcements, HFTs serve as market makers, post competitive spreads, and earn most of their profits through liquidity supply. Right before the announcement, however, HFTs significantly widen spreads and cause a rapid but short-lived drying-out of liquidity. In turbulent periods, such as after the U.K. Brexit announcement, HFTs shift their focus from market making activities to aggressive (but not necessarily profitable) directional strategies. Then, HFT activity becomes dominant and market quality can degrade.

Keywords: High Frequency Trading, Market Making, News Releases, Futures Market, Brexit

JEL Classification: G10, G14

Suggested Citation

Hautsch, Nikolaus and Noé, Michael and Zhang, Sarah, The Ambivalent Role of High-Frequency Trading in Turbulent Market Periods (August 16, 2017). CFS Working Paper, No. 580. Available at SSRN: https://ssrn.com/abstract=3020142 or http://dx.doi.org/10.2139/ssrn.3020142

Nikolaus Hautsch

University of Vienna - Department of Statistics and Operations Research ( email )

Oskar-Morgenstern-Platz 1
Vienna, A-1090
Austria

Center for Financial Studies (CFS) ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Michael Noé

Eurex Frankfurt AG - Derivatives Market Design ( email )

Mergenthalerallee 61
Eschborn, 65760
Germany

Humboldt University of Berlin - School of Business and Economics ( email )

Spandauer Str. 1
Berlin, D-10099
Germany

Sarah Zhang (Contact Author)

University of Manchester - Alliance Manchester Business School ( email )

Crawford House
Oxford Road
Manchester M13 9PL
United Kingdom

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