High-frequency Trading Firms Research Articles

Modeling and Resolving Uncertainty in DIKWP Model

The paper examines the various uncertainties encountered in high-frequency trading (HFT) environments and delves into the multiple challenges faced by HFT firms in navigating the Dodd–Frank Wall Street Reform and Consumer Protection Act (referred to as the “Dodd–Frank Act”), particularly during the initial stages of its enactment. These challenges include the ambiguity surrounding the definition of HFT, the lack of clarity regarding regulatory requirements and boundaries, inconsistencies in enforcement resulting from deviations in understanding the content, and the absence of detailed descriptions of the Act’s provisions. These hurdles significantly impact not only the daily operations of HFT firms but also pose higher demands on their long-term strategic planning and risk management. Drawing upon the Data, Information, Knowledge, Wisdom, and Purpose (DIKWP) model, this study employs an innovative analytical framework. Through the comprehensive application of Cognitive Space, Concept Space, and Semantic Space, it provides a systematic methodology for identifying and analyzing the aforementioned issues. This approach not only aids firms in better comprehending and adhering to complex regulatory requirements but also enables them to explore new business opportunities and competitive advantages while ensuring compliance.

Impact of High-Frequency Trading with an Order Book Imbalance Strategy on Agent-Based Stock Markets

It is known that there is a positive correlation between order book imbalance and future returns. Although some previous studies using actual trading data have suggested that high-frequency trading (HFT) may take this characteristic into account, HFT firms have not disclosed their specific strategies. Furthermore, there has been a long-standing debate in the empirical research field as to whether HFT is the cause of flash crashes, but no final conclusion has been reached. In the present study, we analysed the impacts of HFT taking into account the correlation between order book imbalance and future returns on a stable market and on a market with a flash crash, using agent-based simulations, which are said to be capable of analysing events in their essence. We also analysed how HFT investment performance differs between those two market conditions. The results showed that HFT has the effect of further stabilizing the market when the market is stable but does not take place during flash crashes and so is unable to affect the market either for the good or the bad. The results also suggest that the proposed HFT’s performance is more sensitive to market price fluctuations than conventional HFT (i.e., HFT following a position market-making strategy) and tends to have high risk and high returns.

Tick Size, Competition for Liquidity Provision, and Price Discovery: Evidence from the U.S. Treasury Market

This paper studies how a tick size change affects market quality, price discovery, and the competition for liquidity provision by dealers and high-frequency trading firms (HFTs) in the U.S. Treasury market. Using difference-in-differences regressions around the November 19, 2018, tick size reduction in the 2-year Treasury note and a similar change in the 2-year futures eight weeks later, we find significantly improved market quality. Moreover, dealers become more competitive in liquidity provision and price improvement, consistent with the hypothesis that HFTs find liquidity provision less profitable in the smaller tick size environment. Last, we find a significant shift in short-run price discovery toward the cash market, which then reverses when the futures market tick size is reduced, suggesting that the finer pricing grid in the cash market allows traders to act on small information signals that are not profitable to exploit in the larger-tick futures market. Our findings suggest that reducing the tick size in tick-constrained and highly liquid markets like the Treasury market is on balance beneficial. This paper was accepted by Bruno Biais, finance. Funding: F. Ruela acknowledges support from the National Science Foundation Graduate Research Fellowship Program [Grant DGE-1746045]. Any opinions, findings, and conclusions or recommendations expressed in this material are those of the author(s) and do not necessarily reflect the views of the National Science Foundation. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.4663 .

Striving to make better decision quicker in cloud: big data event trading in high frequency trading perspective

In the world of big data, cloud computing in trading and rapid development in computing hardware and software; cloud computing and high frequency trading (HFT) unconditionally turn to be tightly related as the way market is changing rapidly. We find the practicability of event trading strategy of HFT in the Finnish stock market based on auto regressive empirical test and comparative ratios insinuating the impression on positive recovers of event trading. A specialised version of cloud trading system is then architected after discovering and exploring the feasibility of HFT in event-based trading in the Finnish stock market so that afresh get going HFT firms who are speculating what tact to exercise with what holding period and not capable to get micro second favours of news feed earlier than their adversaries; can practice this discipline and the proposed cloud trading architect for alpha generation.

High‑Frequency Trading in the Modern Market Microstructure: Opportunities and Threats

The article covers some ideas about the research on high-frequency trading and financial market design. The topic is time-relevant because today there exists a need to convince traders that there is a simple structural floor in the way that the financial markets are designed. The article reveals the significance of trading on the floor that the foremost fundamental constraint is limited time. The author proves that time on the financial market feels, to some extent, infinite when someone counts it in millions of seconds, but time is nevertheless finite. The author then gets into the actual research on high-frequency trading in the financial market design. The motivation for this project is to analyse activity among high-frequency trading firms by which investments of substantial sums of money are understood as economically trivial speed improvements. The theoretical significance of the research’s outcomes lies in outlaying the systemic approach to dealing with stochastic control problems in the context of financial engineering. The practical relevance of the paper lies in the mechanism that allows solving problems surrounding optimal trading, market microstructure, high-frequency trading, etc. The article concludes by talking about the issues in the modern electronic markets and by giving lessons to dealing with them in the long run.

Make-take decisions under high-frequency trading competition

The make-take preferences of investors depend on high-frequency trading (HFT) competition, under which HFT firms endogenously acquire speed and informational advantages. In the case where there are many HFT firms in the market, they compete more through limit orders; meanwhile, in the case with few HFT firms, they compete more through market orders that “pick-off" limit orders coming from the big crowd of slow traders. In the former (latter) case, additional HFT competition improves (damage) liquidity. In both cases, HFT competition improves informational efficiency and reduces microstructure noise. Finally, I use the model to analyze potential regulations under HFT competition.

Make-Take Decisions under High-Frequency Trading Competition

The make-take preferences of investors depend on high-frequency trading (HFT) competition, under which HFT firms endogenously acquire speed and informational advantages. In the case where there are many HFT firms in the market, they compete more through limit orders; meanwhile, in the case with few HFT firms, they compete more through market orders that pick-off limit orders coming from the big crowd of slow traders. In the former (latter) case, additional HFT competition improves (damage) liquidity. In both cases, HFT competition improves informational efficiency and reduces microstructure noise. Finally, I use the model to analyze potential regulations under HFT competition.

Phantom Liquidity and High-Frequency Quoting

This article examines every NASDAQ ITCH feed message for S&P 500 Index stocks for 2012 and identifies clusters of extremely high and extremely low limit-order cancellation activity. The authors find results consistent with the idea that cancel clusters are the result of high-frequency traders jockeying for queue position and reacting to information to establish a new price level. Furthermore, few trades seem to be executed during cancel clusters or even immediately after them. Low cancellation activity seems to be markedly different, with many level changes all caused by executions. The results are consistent with high-frequency trading firms behaving as agents who bring efficiency to the market without the need to have executions at intermediate prices. The authors also discuss the misconception that investors and low-frequency traders are synonymous and its implications for policy given these results.

Risk and Return in High-Frequency Trading

We study performance and competition among firms engaging in high-frequency trading (HFT). We construct measures of latency and find that differences in relative latency account for large differences in HFT firms’ trading performance. HFT firms that improve their latency rank due to colocation upgrades see improved trading performance. The stronger performance associated with speed comes through both the short-lived information channel and the risk management channel, and speed is useful for various strategies, including market making and cross-market arbitrage. We find empirical support for many predictions regarding relative latency competition.

Do High Frequency Trading Firms Provide Two-Sided Liquidity?

High-frequency trading (HFT) firms are commonly thought of as the new market makers, although, unlike traditional dealers, they have no affirmative obligation. The authors investigate the quality of HFT-provided liquidity by focusing on whether HFT firms make, with reasonable consistency, two-sided markets. They find that HFT and non-HFT firms contribute approximately equally to liquidity creation, HFT is mostly two-sided, and non-HFT is more one-sided. For the authors’ sample, the two-sided liquidity provision of HFT firms was directed mainly at volatile, large-cap stocks, and it declined sharply during extreme events (i.e., mini flash crashes). Thus, HFT firms appear to be quite selective as market makers.

The Competitive Landscape of High-Frequency Trading Firms

Abstract We examine product differentiation in the high-frequency trading (HFT) industry, where the “products” are secretive proprietary trading strategies. We demonstrate how principal component analysis can be used to detect underlying strategies common to multiple HFT firms and show that there are three product categories with distinct attributes. We study how HFT competition in each product category affects the market environment and present evidence that indicates how it influences the short-horizon volatility of stocks as well as the viability of trading venues. Received October 10, 2016; editorial decision September 30, 2017 by Editor Itay Goldstein. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

The Competitive Landscape of High-Frequency Trading Firms

This paper studies correlations between the strategies of high-frequency trading (HFT) firms, which is a manifestation of the extent of competition in which these firms engage when pursuing similar strategies. We use a principal component analysis to show that there are several underlying common strategies and that the competing HFT firms pursuing these strategies generate most HFT activity. We investigate whether competition between HFT firms creates a systematic return factor, but find no supporting evidence for such an influence. However, the short-interval return volatility of most stocks loads negatively on a market-wide measure of correlated HFT strategies. The mitigating impact of HFT competition on stock volatility appears to be driven at least in part by a market-making strategy. We further document a negative relationship between two forms of competition—that between HFT firms and that between trading venues. We investigate a potential driver behind this negative relationship, and show that greater HFT competition within a trading venue helps smaller trading venues become more competitive or viable in terms of posting better prices and narrower spreads.

High-Frequency Trading and Conflict in the Financial Markets

The last few decades has seen an ever-increasing growth in the way activities are productized and associated with a financial cost. This phenomenon, termed financialization, spans all areas including government, finance, health and manufacturing. Recent developments within finance over that past decade have radically altered the way trading occurs. This paper analyses high-frequency trading (HFT) as a necessary component of the infrastructure that makes financialization possible. Through interviews with HFT firms, a software vendor, regulators and banks, the effects of HFT on market efficiency, and its impact on costs to long-term investors are explored. This paper contributes to the literature by exploring the conflict that exists between HFT and traditional market makers in today's fragmented markets. This paper argues that society should be unconcerned with this conflict and should instead focus on the effects these participants have on the long-term investors, for whom the markets ultimately exist. In order to facilitate the best outcomes, regulation should be simple, aimed at keeping participants’ behavior stable, and the interactions among them transparent and straightforward. Financialization and HFT are inextricably linked, and society is best served by ensuring that the creative energy of these market participants is directed on providing liquidity and removing inefficiencies.

Interactions among High-Frequency Traders

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.

A model for unpacking big data analytics in high-frequency trading

This study develops a conceptual model of the 7V′s of big data analytics to gain a deeper understanding of the strategies and practices of high-frequency trading (HFT) in financial markets. HFT is computerized trading using proprietary algorithms. Empirical data collected from HFT firms and regulators in the US and UK reveals competitive asymmetries between HFTs and low-frequency traders (LFTs) operating more traditional forms of market trading. These findings show that HFT gains extensive market advantages over LFT due to significant investment in advanced technological architecture. Regulators are challenged to keep pace with HFT as different priorities to the 7V′s are given in pursuit of a short term market strategy. This research has implications for regulators, financial practitioners and investors as the technological arms race is fundamentally changing the nature of global financial markets.

Phantom Liquidity and High-Frequency Quoting

This paper examines every NASDAQ ITCH feed message for the S&P 500 stocks for 2012 and identifies clusters of extremely high and extremely low limit order cancellation activity. We find results consistent with the ideas that cancel clusters are the result of high frequency traders jockeying for queue position and reacting to information to establish a new price level. Furthermore, few trades seem to be executed during cancel clusters or even immediately after them. Low cancellation activity seems to be markedly different with many level changes all be caused by executions. Our results are consistent with high frequency trading firms behaving as agents who bring efficiency to the market without the need to have executions at intermediate prices. We also discuss the misconception that investors and low frequency trader are synonymous and its implications for policy given our results.

Bugs, predations or manipulations? Incompatible epistemic regimes of high-frequency trading

Calls for greater transparency as well as corporate and individual accountability have emerged in response to the recent turbulence in financial markets. In the field of high-frequency trading (HFT), suggested solutions have involved a call for increased market information, for example, or better access to the inner workings of algorithmic trading systems. Through a combination of fieldwork conducted in HFT firms and discourse analysis, I show that the problem may not always stem from a lack of information. Instead, my comparative analysis of different market actors (regulators, market analysts and traders) shows that the diverse and complex ways in which they access and construct knowledge out of information in fact lead to what I call different epistemic regimes. An understanding of how epistemic regimes work will enable us to explain not only why the same market event can be viewed as very different things – as market manipulation, predation or error – but also why it is so difficult to arrive at a unified theory or view of HFT. The comparative perspective introduced by the idea of epistemic regimes might also serve as a starting point for the development of a cultural approach to the study of financial markets.

Organizational ignorance: an ethnographic study of high-frequency trading

This paper provides an analysis of strategic uses of ignorance or not-knowing in one of the most secretive industries within the financial sector. The focus of the paper is on the relation between imitation and ignorance within the organizational structure of high-frequency trading (HFT) firms. In social studies of finance (SSF) literature imitation is considered a strategic act, i.e. imitation is a term applied when traders copy the strategies of other traders. I wish to turn this relation between ignorance and imitation on its head and consider ignorance itself as a strategic unknown and investigate the kinds of imitations that might be produced from structures of not-knowing (i.e. structures intended to divide, obscure and protect knowledge). This point is illustrated through ethnographic studies and interviews within five HFT firms. The data show how a black-box structure of ignorance is replicated within the organizational setting of these firms and re-enacted by the traders. Towards the end of the paper the politics of the relationship between imitation and ignorance is discussed.

The Impact of Latency Sensitive Trading on High Frequency Arbitrage Opportunities

Classical economic theory suggests that excess returns should be competed away as new participants enter the market. This is especially true for the profits from riskless arbitrage. Yet, there is conflicting evidence in the financial economic literature over whether high frequency trading (HFT) profits, in general, (Baron et al [2012]) and arbitrage profits, in particular (Budish et al [2013] and Chaboud et al [2013]), decline as high frequency or other algorithmic trading increases. There are important public policy implications for market microstructure and the social value of investments by HFT firms in being faster if arbitrage profit opportunities persist (in the absence of limits to arbitrage). There are several different strategies that high frequency and other latency sensitive traders engage in. These include: index arbitrage; spread arbitrage/market making; and correlated arbitrage among others. This study focuses on only one - index arbitrage. Specifically, it examines whether the duration, frequency and profitability of potential arbitrage opportunities between the Australian Securities Exchange (ASX) Share Price Index (SPI) futures contract and the exchange traded fund (ETF), STW, have changed as the number of HFT firms (or intensity of HFT activity) has increased, since the ASX’s introduction of co-location services in February 2012. In addition, we use estimated potential arbitrage profits and compare them to the cost of being co-located to determine the value of minimum latency. Not surprisingly, we find the frequency and profitability of potential arbitrage opportunities are greater during volatile and high turnover periods - other things equal. We examine the increased competition in high frequency trading by identifying the number of ‘cabinets’ co-located in the ASX’s liquidity center. With increased HFT connections, we observe increasing value, frequency and duration of index arbitrage profit opportunities. Our results are robust to the inclusion of transaction costs. We conclude that the activity of disruptive HFT outweighs the activity of index arbitrage HFTs.

Recent civil and criminal enforcement action involving high frequency trading

Purpose – To alert high frequency trading firms to the increased regulation and prosecution of manipulative trading practices during 2014 and early 2015. Design/methodology/approach – Reviews four significant proceedings against high frequency trading firms (and/or individuals employed by such firms) and other developments from the relevant government agencies as a possible preview of the enforcement and prosecution of high frequency trading practices in 2015. Provides advice to high frequency trading firms on how to decrease the risk of regulatory or criminal actions against them in this changing environment. Findings – Although the focus on high frequency trading has only recently begun to intensify, firms should be aware of the increased enforcement activity of the past year. These actions, both regulatory and criminal, have already resulted in large penalties and have helped initiate a strengthening of rules and regulations regarding manipulative trading practices, of which firms need to be aware and stay current. Practical implications – High frequency trading firms should be aware of the recent regulatory and criminal actions in order to better evaluate their own practices and controls, to ensure that their trading patterns do not resemble manipulative practices, and to avoid similar actions. Originality/value – Practical guidance from experienced litigators and securities regulatory lawyers, including a former SEC Assistant Chief Litigation Counsel and a former federal prosecutor, that consolidates and describes several recent actions and developments in one piece.