 Does high-frequency trading actually improve market liquidity? A comparative study for selected models and measuresRenata Karkowska and Andrzej Palczewski Research in International Business and Finance, 2023, vol. 64, issue C Abstract: The increasing volume of messages sent to the exchange by algorithmic traders stimulates a fierce debate among academics and practitioners on the impacts of high-frequency trading (HFT) on capital markets. By comparing a variety of regression models that associate various measures of market liquidity with measures of high-frequency activity on the same dataset, we find that for some models the increase in high-frequency activity improves market liquidity, but for others, we get the opposite effect. We indicate that this ambiguity does not depend only on the stock market or the data period, but also on the used HFT measure: the increase of high-frequency orders leads to lower market liquidity whereas the increase in high-frequency trades improves liquidity. We hypothesize that the observed decrease in market liquidity associated with an increasing level of high-frequency orders is caused by a rise in quote volatility. Keywords: High-frequency trading; Liquidity; Algorithmic trading; Market microstructure (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:64:y:2023:i:c:s0275531922002586 DOI: 10.1016/j.ribaf.2022.101872 Access Statistics for this article Research in International Business and Finance is currently edited by T. Lagoarde Segot More articles in Research in International Business and Finance from Elsevier |
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