How Does High-Frequency Trading Affect Low- Frequency Trading? Presenter: Kun Li Wolfram Technology Conference, 2014.

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Presentation transcript:

How Does High-Frequency Trading Affect Low- Frequency Trading? Presenter: Kun Li Wolfram Technology Conference, 2014

High-Frequency Trading Securities and Exchange Commission (2010) the use of extraordinarily high-speed and sophisticated computer programs very short time-frames for establishing and liquidating positions not carrying significant, unhedged positions over-night Wolfram Technology Conference, 20142

Objective Examine whether HFT benefits LFT in two dimensions Liquidity Execution Quality Examine the HFT’s intermediary effect on LFT. Wolfram Technology Conference, 20143

Liquidity Measures Trade Frequency per minute (Freq) Average size (Avg_qty) Effective Half-Spread (espread) Realized Half-Spread (rspread) Price Impact by Adverse Selection (Adv_selection) Wolfram Technology Conference, 2014 espread rspread Adv_selection 4

Execution Quality Measures Average Waiting Time (Time_gap) Frequency Ratio of Execution (FR) Quantity Ratio of Execution (QR) Wolfram Technology Conference, 20145

Data Dow Jones Industrial Average 30 stocks, 134 trading days during Nov – May 2011 Micro-second time stamped 3 types of orders: 440 million HFT limit orders (HFT), 107 million LFT limit orders (LO) 54 million LFT market orders (MO). Group order messages by minute. Wolfram Technology Conference, 20146

Explore the impact of HFT on LFT Independent VariablesDependent Variables Wolfram Technology Conference, 20147

Increases the trade frequency of LFT orders. Increases the size of LFT orders. Reduces the waiting time of LFT limit orders. Improves the execution of LFT limit orders. Wolfram Technology Conference, 2014 We find that HFT activity: 8

Intermediary Effect of HFT on LFT Limit Orders Wolfram Technology Conference, Direct Cost to HFT due to Market Makers Direct Cost to HFT due to competition Direct Cost to LFT due to Market Makers Direct Cost to LFT due to HFT

Intermediary Effect of HFT on LFT Limit Orders Wolfram Technology Conference,

Conclusion More HFT activity benefits LFT with More frequency and larger size of orders Higher likelihood to execution and shorter waiting time HFT plays as an intermediary on liquidity transportation to LFT. HFT improves the liquidity and execution quality of LFT. HFT’s intermediary effect becomes dominant by comparison with the traditional market makers. Wolfram Technology Conference,