Competition among high-frequency traders, and market quality

Arbeitspapier

We study empirically how competition among high-frequency traders (HFTs) affects their trading behavior and market quality. Our analysis exploits a unique dataset, which allows us to compare environments with and without high-frequency competition, and contains an exogenous event - a tick size reform - which we use to disentangle the effects of the rising share of high-frequency trading in the market from the effects of high-frequency competition. We find that when HFTs compete, their speculative trading increases. As a result, market liquidity deteriorates and short-term volatility rises. Our findings hold for a variety of market quality and high-frequency trading behavior measures.

Object Details

• ISBN: 978-92-899-3552-4
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 2290

Classification and Topics

• Classification: Wirtschaft ; Asset Pricing; Trading Volume; Bond Interest Rates ; Information and Market Efficiency; Event Studies; Insider Trading ; International Financial Markets ; General Financial Markets: Government Policy and Regulation ; Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors ; Allocative Efficiency; Cost-Benefit Analysis
• Subject: high-frequency trading ; competition ; high-frequency trading strategies ; tick size reform

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Breckenfelder, Johannes
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2019

Further information

• DOI: doi:10.2866/232815
• Handle: http://hdl.handle.net/10419/208324
• Last update: 10.03.2025, 11:44 AM CET