High-frequency trading and its role in fragmented markets
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.
Keywordselectronic market hypothesis high-frequency trading market efficiency regulation securities trading
- Aalbers, M. B. (2015). Corporate Financialization. In N. Castree (Ed.), The International Encyclopedia of Geography: People, the Earth, Environment, and Technology. Oxford: Wiley.Google Scholar
- Chlistalla, M. (2011). High Frequency Trading—Better Than its Reputation. [WWW Document] http://www.dbresearch.de/PROD/DBR_INTERNET_EN-PROD/PROD0000000000269468.PDF.
- Degryse, H., Tombeur, G., and Wuyts, G. (2015). Two Shades of Opacity: Hidden Orders Versus Dark Trading. Working Paper.Google Scholar
- European Commision. (2016). Taxation of the Financial Sector. [WWW Document]. https://ec.europa.eu/taxation_customs/taxation-financial-sector_en
- European Commission. (2004). Directive 2004/39/EC of the European Parliament and of the Council. [WWWDocument] http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2004:145:0001:0044:EN:PDF
- European Commission. (2014). Directive on Markets in Financial Instruments (MiFID 2). [WWW Document] http://eur-lex.europa.eu/legalcontent/EN/TXT/PDF/?uri=CELEX:32014L0065&from=EN
- European Securities and Markets Authority. (2014). Economic Report—High-Frequency-Trading Activity in EU Equity Markets. Retrieved September 30, 2014, [WWW Document] https://www.esma.europa.eu/sites/default/files/library/2015/11/esma20141_-_hft_activity_in_eu_equity_markets.pdf
- European Securities and Markets Authority (2016a). Order Duplication and Liquidity Measurement in EU Equity Markets. [WWW Document] https://www.esma.europa.eu/ sites/default/files/library/2016-907_economic_report_on_duplicated_orders.pdf
- European Securities and Markets Authority. (2016b). ESMA MiFID Database. [WWW Document] https://www.esma.europa.eu/databases-library/registers-and-data
- European Securities and Markets Authority. (2016c). MiFID (II) and MiFIR. [WWW Document] https://www.esma.europa.eu/policy-rules/mifid-ii-and-mifir.
- Fidessa. (2016). Fidessa Fragmentation Index. [WWW Document] http://fragmentation.fidessa.com/.
- German High Frequency Trading Act. (2013). Gesetz zur Vermeidung von Gefahren und Missbräuchen im Hochfrequenzhandel in der Fassung der Bekanntmachung vom 14.5.2014. [WWW Document] http://bvai.de/fileadmin/PDFs/DE/Reg._Rahmenbedingungen_Stellungnahmen/Hochfrequenzhandelsgesetz/HFT-Gesetz-final.pdf
- Gerig, A. (2012). High-Frequency Trading Synchronizes Prices in Financial Markets. Working Paper.Google Scholar
- Haferkorn, M., and Zimmermann, K. (2015). The German High Frequency Trading Act. In 18th Annual Conference of the Swiss Society for Financial Market Research (SGF 2015). Zurich, Switzerland.Google Scholar
- Haferkorn, M., Zimmermann, K., and Siering, M. (2013). The Impact of IT-Based Trading on Securities Markets. In 11th International Conference on Wirtschaftsinformatik (WI2013). Leipzig, Germany.Google Scholar
- Harris, L. (2003). Trading and Exchanges: Market Microstructure for Practitioners. New York: Oxford University Press.Google Scholar
- Herfindahl, O. (1950). Concentration in the Steel Industry. New York, US: Columbia University.Google Scholar
- Kirilenko, A. A., Kyle, A. S., Samadi, M., and Tuzun, T. (2014). The Flash Crash: The Impact of High Frequency Trading on an Electronic Market. [WWW Document] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1686004
- Lexology (2012). French Financial Transactions Tax. [WWW Document] http://www.lexology.com/library/detail.aspx?g=733ecb9c-cdc7-4c0e-b581-affd78f8c874.
- Malinova, K., Park, A., and Riordan, R. (2013). Do Retail Traders Suffer from High Frequency Traders? Working Paper Google Scholar
- Malone, T. W., Yates, J., and Benjamin, R. I. (1987). Electronic Markets and Electronic Hierarchies. Communication of the ACM 30(6): 484–497. doi: 10.1145/214762.214766
- Menkveld, A. J., and Zoican, M. A. (2014). Need for Speed? Exchange Latency and Liquidity. Working Paper.Google Scholar
- Security Exchanges Commission. (2005). Regulation NMS. [WWW Document] https://www.sec.gov/rules/final/34-51808.pdf.
- Snow, J. (1855). On the Mode of Communication of Cholera. London, UK: John Churchill.Google Scholar
- STOXX (2015). EURO STOXX 50 ® Volatility (VSTOXX ® ). [WWW Document] https://www.stoxx.com/index-details?symbol=V2TX.
- Wooldridge, J. M. (2002). Econometric Analysis of Cross Section and Panel Data. London, England: The MIT Press Cambridge.Google Scholar
- Wooldridge, J. M. (2009). Introductory Econometrics: A Modern Approach. San Diego, U.S.: South-Western College Publishing.Google Scholar
- Zhang, F. (2010). High-Frequency Trading, Stock Volatility, and Price Discovery. Working Paper. Google Scholar