scholarly journals Do High-Frequency Traders Anticipate Buying and Selling Pressure?

2020 ◽  
Author(s):  
Nicholas Hirschey
Keyword(s):  
High Frequency ◽  
Order Flow ◽  
Trading Costs

This study provides evidence that high-frequency traders (HFTs) identify patterns in past trades and orders that allow them to anticipate and trade ahead of other investors’ order flow. Specifically, HFTs’ aggressive purchases and sales lead those of other investors, and this effect is stronger at times when it is more difficult for non-HFTs to disguise their order flow. Consistent with some HFTs being more skilled or more focused on anticipatory strategies, I show that trades from a subset of HFTs consistently predict non-HFT order flow the best. The results are not explained by HFTs reacting faster to news or past returns, by contrarian or trend-chasing behavior by non-HFTs, or by trader misclassification. These findings support the existence of an anticipatory trading channel through which HFTs increase non-HFT trading costs. This paper was accepted by Karl Diether, finance.

Unfiltered Market Access and Liquidity: Evidence from the SEC Rule 15c3-5

2020 ◽  
Author(s):  
Bidisha Chakrabarty ◽  
Pankaj K. Jain ◽  
Andriy Shkilko ◽  
Konstantin Sokolov
Keyword(s):  
Adverse Selection ◽  
Market Access ◽  
Securities And Exchange Commission ◽  
Order Flow ◽  
Trading Costs ◽  
Liquidity Provision ◽  
New Information ◽  
The U.S

In November 2011, the U.S. Securities and Exchange Commission implemented the final provision of Rule 15c3-5 curbing unfiltered market access. The provision mandated that brokers verify their clients’ order flow for compliance with credit and capital thresholds before routing to market centers. We find that the new checks introduce latency to order flow and force some latency-sensitive strategies out of the market. As a result, liquidity providers are better able to revise their quotes in response to new information, adverse selection declines, and liquidity improves. Consistent with the notion that the market for liquidity provision is competitive, our results show that the benefit of lower adverse selection is transferred entirely to liquidity demanders in the form of lower trading costs. This paper was accepted by Karl Diether, finance.

scholarly journals High-frequency trading with fractional Brownian motion

2020 ◽  
Author(s):  
Paolo Guasoni ◽  
Yuliya Mishura ◽  
Miklós Rásonyi
Keyword(s):  
Brownian Motion ◽  
Fractional Brownian Motion ◽  
High Frequency ◽  
Asset Price ◽  
Optimal Strategies ◽  
Trading Costs ◽  
Frequency Limit ◽  
Dynamic Optimisation ◽  
High Frequency Limit ◽  
Mean Variance

Abstract In the high-frequency limit, conditionally expected increments of fractional Brownian motion converge to a white noise, shedding their dependence on the path history and the forecasting horizon and making dynamic optimisation problems tractable. We find an explicit formula for locally mean–variance optimal strategies and their performance for an asset price that follows fractional Brownian motion. Without trading costs, risk-adjusted profits are linear in the trading horizon and rise asymmetrically as the Hurst exponent departs from Brownian motion, remaining finite as the exponent reaches zero while diverging as it approaches one. Trading costs penalise numerous portfolio updates from short-lived signals, leading to a finite trading frequency, which can be chosen so that the effect of trading costs is arbitrarily small, depending on the required speed of convergence to the high-frequency limit.

scholarly journals Interactions among High-Frequency Traders

2017 ◽  
Vol 52 (4) ◽  
pp. 1375-1402 ◽  
Author(s):  
Evangelos Benos ◽  
James Brugler ◽  
Erik Hjalmarsson ◽  
Filip Zikes
Keyword(s):  
High Frequency ◽  
Comparison Group ◽  
Equity Market ◽  
Price Impact ◽  
Investment Banks ◽  
Order Flow ◽  
Trading Activity ◽  
Price Efficiency ◽  
Price Pressure ◽  
The Impact

Using unique transactions data for individual high-frequency trading (HFT) firms in the U.K. equity market, we examine the extent to which the trading activity of individual HFT firms is correlated with each other and the impact on price efficiency. We find that HFT order flow, net positions, and total volume exhibit significantly higher commonality than those of a comparison group of investment banks. However, intraday HFT order flow commonality is associated with a permanent price impact, suggesting that commonality in HFT activity is information based and so does not generally contribute to undue price pressure and price dislocations.

scholarly journals Regulations and Technology Behind HFT Latency, Batch Auctions and Payments for Order Flow in the US and EU

e-Finanse ◽  
2018 ◽  
Vol 14 (2) ◽  
pp. 34-46
Author(s):  
Carlos Jorge Lenczewski Martins
Keyword(s):  
High Frequency ◽  
Great Part ◽  
High Frequency Trading ◽  
Order Flow ◽  
Electronic Trading ◽  
Inside Information ◽  
Wholesale Market ◽  
Market Makers ◽  
The Us ◽  
Clock Synchronisation

AbstractSince the appearance of high-frequency trading in the 1990s, speed has become one of the key issues in trading and with it, the controversy around High-Frequency Trading. In recent years, there have been many discussions and analyses of how high-frequency trading may affect the financial market – but still without any clear conclusions. Leaving these opinions behind, many adjustments have already been made in the US and Europe - both to regulations and market rules, impacting not only High-Frequency Trading but general electronic trading as well. These rules and regulations are the result of technological developments in electronic trading and more specifically, High-Frequency Trading and the practice of Payments for Order Flow. The question remains as to how deep regulations should go, especially in the case of HFT which can be severely affected by harsh regulatory requirements or procedures. Because two of the most important issues in HFT are time and information, some of the rules and regulations affect aspects such as not only what type of information and how it should be gathered, but also clock synchronisation and time-stamp granularity. Another issue that may be considered controversial in the field of HFT (although it is not a practice limited to HFT) is Payment For Order Flows. Under this mechanism, wholesale market makers pay brokers for their client’s order flow – a practice that performed in great amounts and at high speeds may give a considerable level of “inside” information. Regulations, especially from ESMA (MiFID II). try in great part to thus mitigate the practice of Payments For Order Flows.The aim of this paper is to present technological advancements in the field of trading communications used, not only by HFT firms, but also by exchanges. Additionally, the objective is to underline some challenges regarding regulatory changes that try to adapt to the current level of technology – for example, those related to clock synchronisation and data processing. One last issue brought forward is the possibility of converting markets from continuous-time auctions to discrete-time auctions - a concept that is aimed at liquidating the speed advantage and competition only to price level and hence, eliminating HFT advantages.

Measuring the Toxicity of Order Flow using High Frequency Data: The Case of KOSPI200 Index Futures

2014 ◽  
Vol 22 (1) ◽  
pp. 117-139
Author(s):  
Ki Yool Ohk ◽  
Ming Wu
Keyword(s):  
High Frequency ◽  
Futures Market ◽  
Informed Trading ◽  
Market Volatility ◽  
High Frequency Data ◽  
Order Flow ◽  
Frequency Data ◽  
Conditional Probability Distribution ◽  
Index Futures ◽  
Probability Of Informed Trading

This study presents a new informed trading probability measure VPIN (Volume-Synchronized Probability of Informed Trading) to estimate toxic order flow of KOSPI200 index futures in a high frequency world. This measure does not require to estimate non-observable parameters as PIN. Also, it is estimated based on volume time, so it can estimate toxicity of order flow in a high frequency world. We show a relation between KOSPI200 index futures VPIN and futures market volatility using correlation and conditional probability distribution. A main empirical result is that persistently high VPIN signifies a high risk of subsequent large futures market volatility. It means that VPIN is a useful measure to estimate a toxicity induced volatility.

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