High frequency trading and stock index returns: A nonlinear dynamic analysis

Abstract

This study seeks to understand whether and to what extent High Frequency Trading (HFT) affects the probabilistic properties of the stock returns in five markets. More specifically, it focuses on the impact of HFT/Machine trading on five major stock indices, DAX, Nikkei 225, S&P 500, Russell 2000, and TOPIX. The empirical analysis demonstrates that while the introduction of machine trading and/or HFT appears to make the return series more “predictable”by reducing their Multiscale Entropy, it does not affect the Markov property, which, not surprisingly, does not hold for the entire return series under study.

Keywords: Heavy-tails, High frequency trading, Markov property, Multi scale entropy