Liquidity commonality and high frequency trading: Evidence from the French stock market

International Review of Financial Analysis, 69, 101428

Posted: 14 Feb 2018 Last revised: 3 Sep 2020

See all articles by Panagiotis Anagnostidis

Panagiotis Anagnostidis

Institut Europlace de Finance (IEF) and European Financial Data Institute (EUROFIDAI)

Patrice C. Fontaine

Eurofidai (CNRS)

Date Written: October 17, 2018

Abstract

High frequency trading (HFT) depends on sophisticated algorithms to closely monitor price changes across securities. Theory predicts this technological advantage should translate into market-wide liquidity co-variation, by transmitting information-based liquidity shocks. Using a dataset of orders and trades from the French stock market, we investigate whether HFT algorithms constitute a source of systematic liquidity risk. We demonstrate that, across securities, the liquidity offered by high frequency traders is significantly less diverse than that of traditional traders; this finding is in line with the cross-asset learning hypothesis. The excessive co-movement in liquidity is also partly explained by common market making rules. In periods of increased market stress, we find HFT, designated market making, and order size to be important sources of liquidity commonality. Our results have policy implications for market regulators in Paris, suggesting the inclusion of maximum spread-limit rules in market making contracts will reduce the possibility of liquidity drying up when markets are in turmoil.

Keywords: High-Frequency Trading, Liquidity, Liquidity commonality, Euronext Paris

JEL Classification: G11; G12; G15

Suggested Citation

Anagnostidis, Panagiotis and Fontaine, Patrice C., Liquidity commonality and high frequency trading: Evidence from the French stock market (October 17, 2018). International Review of Financial Analysis, 69, 101428, Available at SSRN: https://ssrn.com/abstract=3115952 or http://dx.doi.org/10.2139/ssrn.3115952

Panagiotis Anagnostidis (Contact Author)

Institut Europlace de Finance (IEF) and European Financial Data Institute (EUROFIDAI) ( email )

Grenoble
France

Patrice C. Fontaine

Eurofidai (CNRS) ( email )

150, rue de la Chimie - EUROFIDAI UMS CNRS 2748
UGA domaine universitaire
Grenoble Cedex 9, 38058
France

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