A Retrospective Look: Phantom Liquidity And High Frequency Quoting

Abstract

In this paper we take a retrospective look at our paper Phantom Liquidity and High Frequency Quoting and discuss the context of the research in light of our broader inquiry into the nature of the high frequency trading industry. The data presented in this paper appears to show that limit order cancellations of high frequency traders are associated with price discovery and liquidity provision, rather than some manner of systematic taking-advantage-of other market participants. These firms are acting as rational, profit-seeking business, and we believe time has shown this view to be correct. In the years since publication, HFT has matured, and consolidated into fewer, lower-cost providers of efficiency and liquidity services, mush like we would expect in any other industry.