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Interactions among High-Frequency Traders

Published online by Cambridge University Press:  25 July 2017

Evangelos Benos,
James Brugler,
Erik Hjalmarsson and
Filip Zikes
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Abstract

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Using unique transactions data for individual high-frequency trading (HFT) firms in the U.K. equity market, we examine the extent to which the trading activity of individual HFT firms is correlated with each other and the impact on price efficiency. We find that HFT order flow, net positions, and total volume exhibit significantly higher commonality than those of a comparison group of investment banks. However, intraday HFT order flow commonality is associated with a permanent price impact, suggesting that commonality in HFT activity is information based and so does not generally contribute to undue price pressure and price dislocations.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 4 , August 2017, pp. 1375 - 1402
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

Footnotes

1

We are grateful to Satchit Sagade for his help in cleaning and processing the data. The paper has greatly benefited from the advice of Hendrik Bessembinder (the editor) and Allen Carrion (the referee). Other helpful comments were provided by Monica Billio, Dobrislav Dobrev, Björn Hagströmer, Edwin Schooling Latter, Nick Vause, Graham Young, and seminar participants at the Bank of England, the Bank of Greece, Copenhagen Business School, the Federal Reserve Board, the U.K. Financial Conduct Authority, University of Piraeus, University of York, the 2015 conference on the Development of Securities Markets: Trends, Risks and Policies at Bocconi University, the 2015 conference of the International Association of Applied Econometrics, and the 2014 Ioannina Meeting on Applied Economics and Finance. The views in this paper are solely the responsibility of the authors and should not be interpreted as representing the views of the Bank of England or any of its committees, or the U.K. Financial Conduct Authority, or the Board of Governors of the Federal Reserve System or any other person associated with the Federal Reserve System. Hjalmarsson gratefully acknowledges financial support from the Swedish Research Council (Vetenskapsrådet) under Grant 2014-01429.

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