Does high-frequency trading increase systemic risk?

Pankaj K. Jain, Pawan Jain and Thomas McInish ()

Journal of Financial Markets, 2016, vol. 31, issue C, 1-24

Abstract: In 2010, the Tokyo Stock Exchange, the largest stock exchange headquartered outside of the United States, introduced a new trading platform, Arrowhead. This platform reduced latency and increased co-located, high-frequency quoting and trading (HFQ) from zero to 36% of trading volume. During tail events representing extreme market conditions, low-latency correlated HFQ may lead to systemic risks such as flash crashes, which has not been sufficiently addressed in the literature. In this paper, our study provides a framework to assess whether HFQ increases systemic risks and points to the need for incorporating correlations and CoVaR methods in regulating these risks through circuit breakers and other regulations.

Keywords: High-frequency trading; Liquidity; Correlation; Systemic risk; Arrowhead; CoVaR (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:31:y:2016:i:c:p:1-24

DOI: 10.1016/j.finmar.2016.09.004

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