Where is the Value in High Frequency Trading?

Álvaro Cartea () and José Penalva ()
Additional contact information
José Penalva: Universidad Carlos III de Madrid, Spain

Quarterly Journal of Finance (QJF), 2012, vol. 02, issue 03, 1-46

Abstract: We analyze the impact of high frequency (HF) trading in financial markets based on a model with three types of traders: liquidity traders (LTs), professional traders (PTs), and high frequency traders (HFTs). Our four main findings are: (i) The price impact of liquidity trades is higher in the presence of the HFTs and is increasing with the size of the trade. In particular, we show that HFTs reduce (increase) the prices that LTs receive when selling (buying) their equity holdings. (ii) Although PTs lose revenue in every trade intermediated by HFTs, they are compensated with a higher liquidity discount in the market price. (iii) HF trading increases the microstructure noise of prices. (iv) The volume of trades increases as the HFTs intermediate trades between the LTs and PTs. This additional volume is a consequence of trades which are carefully tailored for surplus extraction and are neither driven by fundamentals nor is it noise trading. In equilibrium, HF trading and PTs coexist as competition drives down the profits for new HFTs while the presence of HFTs does not drive out traditional PTs.

Keywords: High frequency traders; high frequency trading; flash trading; liquidity traders; institutional investors; market microstructure; microstructure volatility; execution costs; market quality (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S2010139212500140
Access to full text is restricted to subscribers

Related works:
Working Paper: Where is the value in high frequency trading? (2011)
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:wsi:qjfxxx:v:02:y:2012:i:03:n:s2010139212500140

Ordering information: This journal article can be ordered from

DOI: 10.1142/S2010139212500140

Access Statistics for this article

Quarterly Journal of Finance (QJF) is currently edited by Fernando Zapatero

More articles in Quarterly Journal of Finance (QJF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().