EconPapers    
Economics at your fingertips  
 

Toxic liquidity – is it here to stay?

Carlos Jorge Lenczewski Martins ()
Additional contact information
Carlos Jorge Lenczewski Martins: Warsaw School of Economics, Institute of Risk and Financial Markets

Bank i Kredyt, 2018, vol. 49, issue 1, 1-16

Abstract: Algorithmic trading and high-frequency trading (HFT) volume in the financial market has dynamically increased mainly since the technological revolution of the 2000’s. Turnover from HFT alone may be around 40% and 60% for the European and US equity markets, accordingly. The activity of algorithmic and high-frequency trading has also caused some concerns related to toxic liquidity in the financial market. These concerns reached their peak after the Flash Crash of 6 May 2010 in the US. After some reports of the Flash Crash reached the conclusion that what triggered the freefall was an algorithm, there were questions on whether HFT traders could induce toxic liquidity. The aim of this paper is to present sources and conditions for which toxic liquidity may arise, as well as arguments that high-frequency traders may not necessarily be the source of toxic liquidity. Not only can they be a legitimate source of natural liquidity but also toxic liquidity may actually be attributable to low frequency traders. This paper is based on scarce empirical research available (mainly for the US market) and as such, it is intended to encourage further analysis and research on this important topic.

Keywords: algorithmic trading; high-frequency trading; HFT; liquidity (search for similar items in EconPapers)
JEL-codes: G11 G14 G15 (search for similar items in EconPapers)
Date: 2018
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://bankikredyt.nbp.pl/content/2018/01/BIK_01_2018_01.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbp:nbpbik:v:49:y:2018:i:1:p:1-16

Access Statistics for this article

More articles in Bank i Kredyt from Narodowy Bank Polski Contact information at EDIRC.
Bibliographic data for series maintained by Michał Wieloch ().

 
Page updated 2020-07-23
Handle: RePEc:nbp:nbpbik:v:49:y:2018:i:1:p:1-16