 Low-latency tradingJoel Hasbrouck and Gideon Saar Journal of Financial Markets, 2013, vol. 16, issue 4, 646-679 Abstract: We define low-latency activity as strategies that respond to market events in the millisecond environment, the hallmark of proprietary trading by high-frequency traders though it could include other algorithmic activity as well. We propose a new measure of low-latency activity to investigate the impact of high-frequency trading on the market environment. Our measure is highly correlated with NASDAQ-constructed estimates of high-frequency trading, but it can be computed from widely-available message data. We use this measure to study how low-latency activity affects market quality both during normal market conditions and during a period of declining prices and heightened economic uncertainty. Our analysis suggests that increased low-latency activity improves traditional market quality measures—decreasing spreads, increasing displayed depth in the limit order book, and lowering short-term volatility. Our findings suggest that given the current market structure for U.S. equities, increased low-latency activity need not work to the detriment of long-term investors. Keywords: High-frequency trading; Limit order markets; NASDAQ; Order placement strategies; Liquidity; Market quality (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:finmar:v:16:y:2013:i:4:p:646-679 DOI: 10.1016/j.finmar.2013.05.003 Access Statistics for this article Journal of Financial Markets is currently edited by B. Lehmann, D. Seppi and A. Subrahmanyam More articles in Journal of Financial Markets from Elsevier |
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