Financial Engineering Tools

Financial Engineering Tools

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Rodrigo S.

Rodrigo

High Frequency Trading and Long-Term Investors: A View from the Buy-Side

Investment System Engineer

With proliferation of high-frequency trading (HFT) it is important to understand effect of HFT on market quality and opportunities that HFTs create for long-term (LT) investors to build an efficient regulatory framework. This paper demonstrates an approach that allows us to estimate HFT impact on market quality using information on daily aggregate volumes traded by HFT and LT provided by a bulge-bracket broker in two different trading environments in terms of electronic liquidity: evolving Tokyo equity market and mature London equity market. Our results suggest that at least in liquid names, HFT is mostly involved in opportunistic liquidity provisioning rather than engaging in predatory strategies. While HFT market making activity increases short-term intraday volatility, thus adversely impacting the transaction costs, this impact is more than offset by significant compression of bid-ask spreads leading to a net reduction of trading costs for LT investors.

With proliferation of high-frequency trading (HFT) it is important to understand effect of HFT on market quality and opportunities that HFTs create for...

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  • June 17, 2012
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