High-Frequency Trading and its Role in Fragmented Markets

14 Pages Posted: 21 Aug 2018

See all articles by Martin Haferkorn

Martin Haferkorn

Goethe University Frankfurt Faculty of Economics and Business Administration

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Date Written: August 2017

Abstract

Securities trading underwent a major transformation within the last decade. This transformation was mainly driven by the regulatory induced fragmentation and by the increase of high-frequency trading (HFT). On the basis of the electronic market hypothesis, which poses that coordination costs decline when markets become automated, and the efficient market hypothesis in its semi-strong form, we study the effect of HFT on market efficiency in the European fragmented market landscape. In doing so, we further incorporate the realm of financialization, which criticizes the increase in transaction speed. By conducting a long-term analysis of CAC 40 securities, we find that HFT increases market efficiency by leveling midpoints between Euronext Paris and Bats Chi-X Europe. On the basis of a cross-country event study, we analyze the effect of the German HFT Act. We observe that the midpoint dispersion of blue chip securities between the two leading venues Deutsche Boerse and Bats Chi-X Europe increased. We conclude that HFT increases market efficiency in the European market landscape by transmitting information between distant markets.

Keywords: electronic market hypothesis, high-frequency trading, market efficiency, regulation, securities trading

Suggested Citation

Haferkorn, Martin, High-Frequency Trading and its Role in Fragmented Markets (August 2017). Journal of Information Technology, Vol. 32, Issue 3, 2017. Available at SSRN: https://ssrn.com/abstract=3234242 or http://dx.doi.org/10.1057/s41265-016-0030-6

Martin Haferkorn (Contact Author)

Goethe University Frankfurt Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 4
Frankfurt am Main, 60323
Germany

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