IDEAS home Printed from https://ideas.repec.org/p/ajf/louvlr/2018009.html
   My bibliography  Save this paper

High frequency trading and extreme price movements

Author

Listed:
  • Brogaard, Jonathan
  • Carrion, Allen
  • Moyaert, Thibaut
  • Riordan, Ryan
  • Shkilko, Andriy
  • Sokolov, Konstantin

Abstract

Are endogenous liquidity providers (ELPs) reliable in times of market stress? We examine the activity of a common ELP type—high frequency traders (HFTs)—around extreme price movements (EPMs). We find that on average HFTs provide liquidity during EPMs by absorbing imbalances created by non-high frequency traders (nHFTs). Yet HFT liquidity provision is limited to EPMs in single stocks. When several stocks experience simultaneous EPMs, HFT liquidity demand dominates their supply. There is little evidence of HFTs causing EPMs.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Brogaard, Jonathan & Carrion, Allen & Moyaert, Thibaut & Riordan, Ryan & Shkilko, Andriy & Sokolov, Konstantin, 2018. "High frequency trading and extreme price movements," LIDAM Reprints LFIN 2018009, Université catholique de Louvain, Louvain Finance (LFIN).
    • Handle: RePEc:ajf:louvlr:2018009
    Note: In : Journal of Financial Economics, Vol. 128, no. 2, p. 253-265 (2018)
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Sandrine Jacob Leal & Mauro Napoletano & Andrea Roventini & Giorgio Fagiolo, 2016. "Rock around the clock: An agent-based model of low- and high-frequency trading," Journal of Evolutionary Economics, Springer, vol. 26(1), pages 49-76, March.
    2. Clark-Joseph, Adam D. & Ye, Mao & Zi, Chao, 2017. "Designated market makers still matter: Evidence from two natural experiments," Journal of Financial Economics, Elsevier, vol. 126(3), pages 652-667.
    3. James J. Angel & Lawrence E. Harris & Chester S. Spatt, 2011. "Equity Trading in the 21stCentury," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 1(01), pages 1-53.
    4. Sanford J. Grossman & Merton H. Miller, 1988. "Liquidity and Market Structure," NBER Working Papers 2641, National Bureau of Economic Research, Inc.
    5. Bessembinder, Hendrik & Carrion, Allen & Tuttle, Laura & Venkataraman, Kumar, 2016. "Liquidity, resiliency and market quality around predictable trades: Theory and evidence," Journal of Financial Economics, Elsevier, vol. 121(1), pages 142-166.
    6. Aitken, Michael & Cumming, Douglas & Zhan, Feng, 2015. "High frequency trading and end-of-day price dislocation," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 330-349.
    7. Stefan Nagel, 2012. "Evaporating Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 25(7), pages 2005-2039.
    8. Mark S. Seasholes & Terrence Hendershott, 2007. "Market Maker Inventories and Stock Prices," American Economic Review, American Economic Association, vol. 97(2), pages 210-214, May.
    9. Carrion, Allen, 2013. "Very fast money: High-frequency trading on the NASDAQ," Journal of Financial Markets, Elsevier, vol. 16(4), pages 680-711.
    10. Jared Egginton, 2014. "The Declining Role of NASDAQ Market Makers," The Financial Review, Eastern Finance Association, vol. 49(3), pages 461-480, August.
    11. Menkveld, Albert J., 2013. "High frequency trading and the new market makers," Journal of Financial Markets, Elsevier, vol. 16(4), pages 712-740.
    12. So, Eric C. & Wang, Sean, 2014. "News-driven return reversals: Liquidity provision ahead of earnings announcements," Journal of Financial Economics, Elsevier, vol. 114(1), pages 20-35.
    13. Maureen O'Hara & Chen Yao & Mao Ye, 2014. "What's Not There: Odd Lots and Market Data," Journal of Finance, American Finance Association, vol. 69(5), pages 2199-2236, October.
    14. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Ebens, Heiko, 2001. "The distribution of realized stock return volatility," Journal of Financial Economics, Elsevier, vol. 61(1), pages 43-76, July.
    15. repec:bla:jfinan:v:43:y:1988:i:3:p:617-37 is not listed on IDEAS
    16. Lee, Suzanne S. & Mykland, Per A., 2012. "Jumps in equilibrium prices and market microstructure noise," Journal of Econometrics, Elsevier, vol. 168(2), pages 396-406.
    17. Jonathan Brogaard & Terrence Hendershott & Ryan Riordan, 2014. "High-Frequency Trading and Price Discovery," The Review of Financial Studies, Society for Financial Studies, vol. 27(8), pages 2267-2306.
    18. Hasbrouck, Joel & Saar, Gideon, 2013. "Low-latency trading," Journal of Financial Markets, Elsevier, vol. 16(4), pages 646-679.
    19. Amihud, Yakov & Mendelson, Haim, 1980. "Dealership market : Market-making with inventory," Journal of Financial Economics, Elsevier, vol. 8(1), pages 31-53, March.
    20. Conrad, Jennifer & Wahal, Sunil & Xiang, Jin, 2015. "High-frequency quoting, trading, and the efficiency of prices," Journal of Financial Economics, Elsevier, vol. 116(2), pages 271-291.
    21. Andrei Kirilenko & Albert S. Kyle & Mehrdad Samadi & Tugkan Tuzun, 2017. "The Flash Crash: High-Frequency Trading in an Electronic Market," Journal of Finance, American Finance Association, vol. 72(3), pages 967-998, June.
    22. Anand, Amber & Venkataraman, Kumar, 2016. "Market conditions, fragility, and the economics of market making," Journal of Financial Economics, Elsevier, vol. 121(2), pages 327-349.
    23. Linda Allen & Turan G. Bali & Yi Tang, 2012. "Does Systemic Risk in the Financial Sector Predict Future Economic Downturns?," The Review of Financial Studies, Society for Financial Studies, vol. 25(10), pages 3000-3036.
    24. Craig W. Holden & Stacey Jacobsen, 2014. "Liquidity Measurement Problems in Fast, Competitive Markets: Expensive and Cheap Solutions," Journal of Finance, American Finance Association, vol. 69(4), pages 1747-1785, August.
    25. Alain P. Chaboud & Benjamin Chiquoine & Erik Hjalmarsson & Clara Vega, 2014. "Rise of the Machines: Algorithmic Trading in the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 69(5), pages 2045-2084, October.
    26. Carole Comerton‐Forde & Terrence Hendershott & Charles M. Jones & Pamela C. Moulton & Mark S. Seasholes, 2010. "Time Variation in Liquidity: The Role of Market‐Maker Inventories and Revenues," Journal of Finance, American Finance Association, vol. 65(1), pages 295-331, February.
    27. Chan, K C & Christie, William G & Schultz, Paul H, 1995. "Market Structure and the Intraday Pattern of Bid-Ask Spreads for NASDAQ Securities," The Journal of Business, University of Chicago Press, vol. 68(1), pages 35-60, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dodd, Olga & Frijns, Bart & Indriawan, Ivan & Pascual, Roberto, 2023. "US cross-listing and domestic high-frequency trading: Evidence from Canadian stocks," Journal of Empirical Finance, Elsevier, vol. 72(C), pages 301-320.
    2. Zhou, Hao & Kalev, Petko S., 2019. "Algorithmic and high frequency trading in Asia-Pacific, now and the future," Pacific-Basin Finance Journal, Elsevier, vol. 53(C), pages 186-207.
    3. Rif, Alexandru & Utz, Sebastian, 2021. "Short-term stock price reversals after extreme downward price movements," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 123-133.
    4. Bogousslavsky, Vincent & Collin-Dufresne, Pierre & Sağlam, Mehmet, 2021. "Slow-moving capital and execution costs: Evidence from a major trading glitch," Journal of Financial Economics, Elsevier, vol. 139(3), pages 922-949.
    5. Cox, Justin & Woods, Donovan, 2023. "COVID-19 and market structure dynamics," Journal of Banking & Finance, Elsevier, vol. 147(C).
    6. Anagnostidis, Panagiotis & Fontaine, Patrice, 2020. "Liquidity commonality and high frequency trading: Evidence from the French stock market," International Review of Financial Analysis, Elsevier, vol. 69(C).
    7. Ligot, Stephanie & Gillet, Roland & Veryzhenko, Iryna, 2021. "Intraday volatility smile: Effects of fragmentation and high frequency trading on price efficiency," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).
    8. Chordia, Tarun & Miao, Bin, 2020. "Market efficiency in real time: Evidence from low latency activity around earnings announcements," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    9. Breedon, Francis & Chen, Louisa & Ranaldo, Angelo & Vause, Nicholas, 2023. "Judgment day: Algorithmic trading around the Swiss franc cap removal," Journal of International Economics, Elsevier, vol. 140(C).
    10. Gonçalves, Jorge & Kräussl, Roman & Levin, Vladimir, 2019. "Do "speed bumps" prevent accidents in financial markets?," CFS Working Paper Series 636, Center for Financial Studies (CFS).
    11. Ekinci, Cumhur & Ersan, Oguz, 2018. "A new approach for detecting high-frequency trading from order and trade data," Finance Research Letters, Elsevier, vol. 24(C), pages 313-320.
    12. Craig W. Holden & Stacey Jacobsen & Avanidhar Subrahmanyam, 2014. "The Empirical Analysis of Liquidity," Foundations and Trends(R) in Finance, now publishers, vol. 8(4), pages 263-365, December.
    13. Chakrabarty, Bidisha & Pascual, Roberto, 2023. "Stock liquidity and algorithmic market making during the COVID-19 crisis," Journal of Banking & Finance, Elsevier, vol. 147(C).
    14. Aggarwal, Nidhi & Panchapagesan, Venkatesh & Thomas, Susan, 2023. "When is the order-to-trade ratio fee effective?," Journal of Financial Markets, Elsevier, vol. 62(C).
    15. Hendershott, Terrence & Menkveld, Albert J., 2014. "Price pressures," Journal of Financial Economics, Elsevier, vol. 114(3), pages 405-423.
    16. Zhou, Hao & Elliott, Robert J. & Kalev, Petko S., 2019. "Information or noise: What does algorithmic trading incorporate into the stock prices?," International Review of Financial Analysis, Elsevier, vol. 63(C), pages 27-39.
    17. Hautsch, Nikolaus & Noé, Michael & Zhang, S. Sarah, 2017. "The ambivalent role of high-frequency trading in turbulent market periods," CFS Working Paper Series 580, Center for Financial Studies (CFS).
    18. Adrian, Tobias & Capponi, Agostino & Fleming, Michael & Vogt, Erik & Zhang, Hongzhong, 2020. "Intraday market making with overnight inventory costs," Journal of Financial Markets, Elsevier, vol. 50(C).
    19. Syamala, Sudhakara Reddy & Wadhwa, Kavita, 2020. "Trading performance and market efficiency: Evidence from algorithmic trading," Research in International Business and Finance, Elsevier, vol. 54(C).
    20. Hussain, Syed Mujahid & Ahmad, Nisar & Ahmed, Sheraz, 2023. "Applications of high-frequency data in finance: A bibliometric literature review," International Review of Financial Analysis, Elsevier, vol. 89(C).

    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ajf:louvlr:2018009. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Séverine De Visscher (email available below). General contact details of provider: https://edirc.repec.org/data/lfuclbe.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.