What is the main purpose of this paper?

To obtain their results the authors follow Hendershott and Menkveld’s (2011) approach, and use a state space model to decompose price movements into permanent and temporary components and to relate changes in both to HFTs.

What is the meaning of transitory price movements?

Transitory price movements, also called noise or short-term volatility make it difficult for unsophisticated investors to determine the true price.

What is the purpose of this paper?

This paper examines the role of HFTs in the stock market using transaction level data from NASDAQ that identifies the buying and selling activity of a large group of HFTs.

What is the main difference between HFTs and other intermediaries?

At the same time, HFTs being informed allows them to play a beneficial role in price efficiency by trading in the opposite direction to transitory pricing errors and in the same direction as future efficient price movements.

What is the way to organize securities markets?

When considering the best way to organize securities markets and particularly the intermediation sector, the current one with HFT more resembles a highly competitive environment than traditional a market structure.

Open AccessJournal Article10.1093/RFS/HHU032

High-Frequency Trading and Price Discovery

Jonathan Brogaard, +2 more

- 01 Aug 2014

- Review of Financial Studies

- Vol. 27, Iss: 8, pp 2267-2306

1.2K

TL;DR: In this paper, the role of high-frequency traders (HFTs) in price discovery and price efficiency is examined, and it is shown that HFTs facilitate price efficiency by trading in the direction of permanent price changes and in the opposite direction of transitory pricing errors.

Abstract: We examine the role of high-frequency traders (HFTs) in price discovery and price efficiency. Overall HFTs facilitate price efficiency by trading in the direction of permanent price changes and in the opposite direction of transitory pricing errors, both on average and on the highest volatility days. This is done through their liquidity demanding orders. In contrast, HFTs' liquidity supplying orders are adversely selected. The direction of HFTs' trading predicts price changes over short horizons measured in seconds. The direction of HFTs' trading is correlated with public information, such as macro news announcements, market-wide price movements, and limit order book imbalances.

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Most frequently asked questions

1. What is the main concept of the state space model?

The state space model incorporates the interrelated concepts of price discovery (how information is impounded into prices) and price efficiency (the informativeness of prices).

2. What is the main idea behind the HFTs' existence?

Introducing measures to curb their activities without corresponding measures to that support price discovery and market efficiency improving activities could result in less efficient markets.

3. What is the main question in the article?

A central question is whether there were possible benefits from the old more highly regulated intermediation sector, e.g., requiring continuous liquidity supply and limiting liquidity demand that outweigh lower innovation and monopolistic pricing typically associated with regulation.

4. What is the role of HFTs in the stock market?

The direction of HFTs’ trading is correlated with public information, such as macro news announcements, market-wide price movements, and limit order book imbalances.

Figure 1 Overall correlation of HFT and Returns

Figure 5 HFT trading and portfolio returns for negative macro announcements

Table 2 State space model of HFTAll and prices

Table 11 Limit Order Book Imbalance and Subsequent HFT

Citations

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- 30 Mar 2018

- Journal of Management Information System...

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Joel Hasbrouck, +1 more

- 01 Nov 2013

- Journal of Financial Markets

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•Journal Article•10.1093/QJE/QJV027

The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response

Eric Budish, +2 more

- 01 Nov 2015

- Quarterly Journal of Economics

TL;DR: In this article, the authors argue that the continuous limit order book is a flawed market design and propose that financial exchanges instead use frequent batch auctions: uniform-price sealed-bid double auctions conducted at frequent but discrete time intervals, e.g., every 1 second.

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•Journal Article•10.1016/J.FINMAR.2013.06.006

High frequency trading and the new market makers

Albert J. Menkveld, +1 more

- 01 Nov 2013

- Journal of Financial Markets

TL;DR: In this paper, the authors characterize the trading strategy of a large high frequency trader (HFT) and show that performance is very sensitive to cost of capital assumptions, and employ a cross-market strategy as half of its trades materialize on the incumbent market and the other half on a small, high-growth entrant market.

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Disclosure Processing Costs, Investors’ Information Choice, and Equity Market Outcomes: A Review

Elizabeth Blankespoor, +2 more

- 01 Nov 2020

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TL;DR: This paper reviewed the literature examining how costs of monitoring for, acquiring, and analyzing firm disclosures (collectively, "disclosure processing costs") affect investor information choices, trades, and market outcomes.

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References

Journal Article•10.1093/RFS/HHS053

Flow Toxicity and Liquidity in a High-frequency World

David Easley, +2 more

- 01 May 2012

- Review of Financial Studies

TL;DR: In this paper, the authors present a new procedure to estimate flow toxicity based on volume imbalance and trade intensity (VPIN toxicity metric), which is updated in volume time, making it applicable to the high-frequency world, and does not require the intermediate estimation of non-observable parameters or the application of numerical methods.

...read moreread less

538

Journal Article•10.1111/J.1540-6261.1993.TB05121.X

The Trades of Market Makers: An Empirical Analysis of NYSE Specialists

Joel Hasbrouck, +1 more

- 01 Dec 1993

- Journal of Finance

TL;DR: In this paper, a transaction-level empirical analysis of the trading activities of New York Stock Exchange specialists is presented, which suggests that trades in which the specialist participates have a higher immediate impact on the quotes than trades with no specialist participation.

...read moreread less

426

Journal Article•10.3905/JPM.2011.37.2.118

The Microstructure of the “Flash Crash”: Flow Toxicity, Liquidity Crashes, and the Probability of Informed Trading

David Easley, +2 more

- 31 Jan 2011

- The Journal of Portfolio Management

TL;DR: In this paper, the authors argue that the flash crash was the result of the new dynamics at play in the current market structure and highlight the role played by order toxicity in affecting liquidity provision, and show that a measure of this toxicity, the volume synchronized probability of informed trading (VPIN), captures the increasing toxicity of the order flow in the hours and days prior to collapse.

...read moreread less

397

Journal Article•10.1016/J.FINMAR.2013.05.009

The diversity of high-frequency traders ☆

Björn Hagströmer, +1 more

- 01 Nov 2013

- Journal of Financial Markets

TL;DR: In this article, the authors compare market-making HFT strategies to opportunistic HFTs and find that market makers constitute the lion's share of HFT trading volume and limit order traffic.

...read moreread less

392

Journal Article•10.2139/SSRN.2153272

The Diversity of High-Frequency Traders

Björn Hagströmer, +1 more

- 18 May 2013

- Social Science Research Network

TL;DR: In this article, the authors compare market-making HFT strategies to opportunistic HFTs and find that market makers constitute the lion's share of HFT trading volume (65-71%) and limit order traffic (81-86%).

...read moreread less

386

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High-Frequency Trading and Price Discovery

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Most frequently asked questions

1. What is the main concept of the state space model?

2. What is the main idea behind the HFTs' existence?

3. What is the main question in the article?

4. What is the role of HFTs in the stock market?

5. What is the main purpose of this paper?

6. What is the meaning of transitory price movements?

7. What is the purpose of this paper?

8. What is the main difference between HFTs and other intermediaries?

9. What is the way to organize securities markets?

Figures

Citations

On the Fintech Revolution: Interpreting the Forces of Innovation, Disruption, and Transformation in Financial Services

Low-latency trading $

The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response

High frequency trading and the new market makers

Disclosure Processing Costs, Investors’ Information Choice, and Equity Market Outcomes: A Review

References

Flow Toxicity and Liquidity in a High-frequency World

The Trades of Market Makers: An Empirical Analysis of NYSE Specialists

The Microstructure of the “Flash Crash”: Flow Toxicity, Liquidity Crashes, and the Probability of Informed Trading

The diversity of high-frequency traders ☆

The Diversity of High-Frequency Traders

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