Abstract
This paper explores limit order book resiliency following liquidity shocks in the presence of high-frequency traders. Based on a unique data set that enables the identification of orders submitted by algorithms and subscribers of co-location services, we study whether high-frequency traders are involved in the replenishment of the order book. We analyze order submission and deletion activity before and after liquidity shocks initiated by large market orders. Our results show that exclusively high-frequency traders reduce the spread within the first seconds after the liquidity shock making use of their speed advantage. However, liquidity recovery in terms of order book depth takes significantly longer and is accomplished by human traders' submission activity only.
Highlights
Since the emergence of highly automated trading desks and fully electronic securities markets, academics, regulators, and trading firms argue about the direct and indirect consequences of this technological evolution on modern securities markets
The results of the regression model described in the previous subsection are provided in Table 7, which includes the estimates based on both net liquidity provision (NLP)
We study the liquidity provision and the respective contribution to order book resiliency of high‐frequency traders (HFTs), algorithmic trading (AT), and human traders around market impact events caused by large market orders
Summary
Since the emergence of highly automated trading desks and fully electronic securities markets, academics, regulators, and trading firms argue about the direct and indirect consequences of this technological evolution on modern securities markets. Among the most controversially discussed issues is the impact of high‐frequency traders (HFTs) on market quality in open limit order books (Haferkorn 2017). Proponents of high‐frequency trading (HFT) argue that automated decision making and. Open access funding enabled and organized by Projekt DEAL.
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