High Frequency Trading and Its Impact on Market Quality

Peiteng Zhai, Fordham University

Abstract

This paper examines the impact of High Frequency Trading(HFT) activities on equities market. I choose a sample period between July 20th, 2015 and October 16th, 2015, during which period the market went through a relatively volatile and almost a U-shaped period. The sample stocks were the 33 companies with the largest market capitalization in S&P 500 index by the end of the last trading day before our sample period (July 17th, 2015). The total market capitalization of the 33 companies consisted of more than 50% of total S&P 500’s market capitalization. We defined the HFT activities using the timestamps of each message for stocks. When the message was linked to another message within 50 milliseconds, we defined it as HFT message. We found that 15.85% of the messages in our sample were HFT messages. With the defined HFT activities, we find the most important determinant of HFT activities is the market capitalization. There is also GARCH effect in the HFT activities. Then we measure market quality by liquidity and volatility in one, five, and ten-minute intervals through spread and realized high-low during the intervals. We find consistent results that HFT activities brought liquidity out of market and raised short-term market volatility. Therefore, we draw the conclusion that HFT activities in our sample period had a pernicious impact on market quality. ^

Subject Area

Economics

Recommended Citation

Zhai, Peiteng, "High Frequency Trading and Its Impact on Market Quality" (2018). ETD Collection for Fordham University. AAI10685287.
https://fordham.bepress.com/dissertations/AAI10685287

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