Fragmentation Under High Frequency Trading: Theory and Evidence

24 Pages Posted: 9 Aug 2018 Last revised: 14 Oct 2018

See all articles by Kazuyuki Higashi

Kazuyuki Higashi

University of Tokyo - Faculty of Economics

Date Written: September 28, 2018

Abstract

I investigate the fragmentation under high frequency trading (HFT) popularity. I make a toy model of security exchange market competition. With the friction like the Bertrand competition with differentiated goods, the effect of the number of venues on bid ask spread depends on the business stealing effect. Using Nikkei 225 future's data and focusing on the system down of Singapore Exchange as a natural experiment, I show the smaller number of venues means larger bid ask spread. When we think about welfare loss both from HFT investment and the effect of bid ask spread, the relationship between the number of venues and welfare is vague.

Keywords: Fragmentation, High Frequency Trading, Continuous Limit Order Book, Batch Auction

JEL Classification: D44, D47, G14, G18

Suggested Citation

Higashi, Kazuyuki, Fragmentation Under High Frequency Trading: Theory and Evidence (September 28, 2018). Available at SSRN: https://ssrn.com/abstract=3220124 or http://dx.doi.org/10.2139/ssrn.3220124

Kazuyuki Higashi (Contact Author)

University of Tokyo - Faculty of Economics ( email )

7-3-1 Hongo, Bunkyo-ku
Tokyo 113-0033
Japan

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