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How does HFT activity impact market volatility and the bid-ask spread after an exogenous shock? An empirical analysis on S&P 500 ETF

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  • Bazzana, Flavio
  • Collini, Andrea

Abstract

In this paper, we empirically analyse infra-second datasets of the SPDR S&P 500 ETF (specifically, the ETF of the S&P 500 exchanged on BATS, named SPY.Z) in order to explain how high-frequency trading (HFT) activities (aggressive and passive) impact market volatility and the bid-ask spread before and after an exogenous shock (i.e., the 2016 US presidential election). Using SPDR S&P 500 ETF datasets as a proxy for the market on regular volume trading days (November 3, 2016) and on high-volume trading days (November 9, 2016), we show that HFT, on average, has a disturbing action mainly on regular volume trading days, whereas on high-volume trading days, it appears to have a stabilizing effect by balancing both the volatility and bid-ask spread. That is, HFT as a whole has a more neutral impact on the market’s volatility and bid-ask spread than the single aggressive and passive components. In fact, aggressive HFT has a consistent negative effect that increases, on average, both the volatility and bid-ask spread, whereas passive HFT displays a positive effect that decreases, on average, the volatility and bid-ask spread.

Suggested Citation

  • Bazzana, Flavio & Collini, Andrea, 2020. "How does HFT activity impact market volatility and the bid-ask spread after an exogenous shock? An empirical analysis on S&P 500 ETF," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    • Handle: RePEc:eee:ecofin:v:54:y:2020:i:c:s1062940820301376
    DOI: 10.1016/j.najef.2020.101240
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    Cited by:

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    2. Kathrin Hellmuth & Christian Klingenberg, 2022. "Computing Black Scholes with Uncertain Volatility-A Machine Learning Approach," Papers 2202.07378, arXiv.org.
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    More about this item

    Keywords

    High-frequency trading; Volatility; Bid-ask spread;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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