High-frequency quoting, trading, and the efficiency of prices

Jennifer Conrad, Sunil Wahal and Jin Xiang

Journal of Financial Economics, 2015, vol. 116, issue 2, 271-291

Abstract: We examine the relation between high frequency quotation and the behavior of stock prices between 2009 and 2011 for the full cross section of securities in the US. On average, higher quotation activity is associated with price series that more closely resemble a random walk, and significantly lower cost of trading. We also explore market resiliency during periods of exceptionally high low-latency trading: large liquidity drawdowns in which, within the same millisecond, trading algorithms systematically sweep large volume across multiple trading venues. Although such large drawdowns incur trading costs, they do not appear to degrade the price formation process or increase the subsequent cost of trading. In an out-of-sample analysis, we investigate an exogenous technological change to the trading environment on the Tokyo Stock Exchange that dramatically reduces latency and allows co-location of servers. This shock also results in prices more closely resembling a random walk and a sharp decline in the cost of trading.

Keywords: High frequency trading; Market microstructure; Market efficiency (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (80)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:116:y:2015:i:2:p:271-291

DOI: 10.1016/j.jfineco.2015.02.008

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