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High-frequency trading and its role in fragmented markets

  • Research Article
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Journal of Information Technology

Abstract

Securities trading underwent a major transformation within the last decade. This transformation was mainly driven by the regulatory induced fragmentation and by the increase of high-frequency trading (HFT). On the basis of the electronic market hypothesis, which poses that coordination costs decline when markets become automated, and the efficient market hypothesis in its semi-strong form, we study the effect of HFT on market efficiency in the European fragmented market landscape. In doing so, we further incorporate the realm of financialization, which criticizes the increase in transaction speed. By conducting a long-term analysis of CAC 40 securities, we find that HFT increases market efficiency by leveling midpoints between Euronext Paris and Bats Chi-X Europe. On the basis of a cross-country event study, we analyze the effect of the German HFT Act. We observe that the midpoint dispersion of blue chip securities between the two leading venues Deutsche Boerse and Bats Chi-X Europe increased. We conclude that HFT increases market efficiency in the European market landscape by transmitting information between distant markets.

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  1. Goethe University Frankfurt, Frankfurt am Main, Germany

    Martin Haferkorn

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  1. Martin Haferkorn
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Correspondence to Martin Haferkorn.

Appendix

Appendix

See Tables 4 and 5.

Table 4 Overview about current and planned European HFT regulations
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Table 5 Securities used in our analysis along with their Reuters Instrument Code (RIC) and their respective market capitalization on the January 2, 2013 (in billion Euro)
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Haferkorn, M. High-frequency trading and its role in fragmented markets. J Inf Technol 32, 283–296 (2017). https://doi.org/10.1057/s41265-016-0030-6

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