The implications of high-frequency trading on market efficiency and price discovery

Viktor Manahov and Robert Hudson

Applied Economics Letters, 2014, vol. 21, issue 16, 1148-1151

Abstract: This study investigates the implications of high-frequency trading (HFT) on market efficiency and price discovery by using state-space models and real-life one-minute high-frequency data of the six most traded currency pairs worldwide - USD/EUR, USD/JPY, USD/GBP, USD/AUD, USD/CHF and USD/CAD. We found significant evidence that HFT enhances market efficiency and has a beneficial role in price discovery by trading in the direction of the permanent component of the state-space model and in the opposite direction of its transitory component.

Date: 2014
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DOI: 10.1080/13504851.2014.914135

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