High-Frequency Trading as Viewed through an Electron Microscope

Albert Menkveld

Financial Analysts Journal, 2018, vol. 74, issue 2, 24-31

Abstract: The electron microscope improved our vision by a factor of 1 million, enabling us to see atoms. In this study, I aim for a similar leap by examining trades executed in nanoseconds, a million times more precise than the oft-used milliseconds. This approach allows us to observe asset reallocations among rapid-fire “tradebots,” including those used by high-frequency traders (HFTs). Some 20% of trades occur in submillisecond clusters, which seem to have no price instability. Although submillisecond trade bursts are costly to non-HFTs in terms of adverse selection, these costs can be avoided. Disclosure: The author reports no conflicts of interest. Editor’s Note Submitted 13 January 2017Accepted 16 May 2017 by Stephen J. Brown

Date: 2018
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DOI: 10.2469/faj.v74.n2.1

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