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Interactions among high-frequency traders

Author

Listed:
  • Benos, Evangelos

    (Bank of England)

  • Brugler, James

    (University of Cambridge, Faculty of Economics)

  • Hjalmarsson , Erik

    (University of Gothenburg, Department of Economics)

  • Zikes , Filip

    (Bank of England)

Abstract

Using unique transactions data for individual high-frequency trading (HFT) firms in the UK equity market, we examine if the trading activity of individual HFT firms is contemporaneously and dynamically correlated with each other, and what impact this has on price efficiency. We find that HFT order flow exhibits significantly higher commonality than the order flow of a control group of investment banks, both within and across stocks. 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.

Suggested Citation

  • Benos, Evangelos & Brugler, James & Hjalmarsson , Erik & Zikes , Filip, 2015. "Interactions among high-frequency traders," Bank of England working papers 523, Bank of England.
    • Handle: RePEc:boe:boeewp:0523
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    References listed on IDEAS

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    Cited by:

    1. Anderson, Nicola & Webber, Lewis & Noss, Joseph & Beale, Daniel & Crowley-Reidy, Liam, 2015. "Financial Stability Paper 34: The resilience of financial market liquidity," Bank of England Financial Stability Papers 34, Bank of England.
    2. Klein, Olga & Song, Shiyun, 2021. "Commonality in intraday liquidity and multilateral trading facilities: Evidence from Chi-X Europe," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 73(C).
    3. Arumugam, Devika & Prasanna, P. Krishna & Marathe, Rahul R., 2023. "Do algorithmic traders exploit volatility?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
    4. Benos, Evangelos & Sagade, Satchit, 2016. "Price discovery and the cross-section of high-frequency trading," Journal of Financial Markets, Elsevier, vol. 30(C), pages 54-77.
    5. Breckenfelder, Johannes, 2024. "Competition among high-frequency traders and market quality," Journal of Economic Dynamics and Control, Elsevier, vol. 166(C).
    6. 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.
    7. Arumugam, Devika, 2023. "Algorithmic trading: Intraday profitability and trading behavior," Economic Modelling, Elsevier, vol. 128(C).
    8. Chaboud, Alain & Hjalmarsson, Erik & Zikes, Filip, 2021. "The evolution of price discovery in an electronic market," Journal of Banking & Finance, Elsevier, vol. 130(C).
    9. 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).
    10. Karvik, Geir-Are & Noss, Joseph & Worlidge, Jack & Beale, Daniel, 2018. "The deeds of speed: an agent-based model of market liquidity and flash episodes," Bank of England working papers 743, Bank of England.
    11. Van Vliet, Ben, 2017. "Capability satisficing in high frequency trading," Research in International Business and Finance, Elsevier, vol. 42(C), pages 509-521.
    12. Yan Chen & Peter Cramton & John A. List & Axel Ockenfels, 2021. "Market Design, Human Behavior, and Management," Management Science, INFORMS, vol. 67(9), pages 5317-5348, September.
    13. Zura Kakushadze & Juan Andrés Serur, 2018. "151 Trading Strategies," Springer Books, Springer, number 978-3-030-02792-6, December.
    14. Ramos, Henrique Pinto & Perlin, Marcelo Scherer, 2020. "Does algorithmic trading harm liquidity? Evidence from Brazil," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    15. Sánchez Serrano Antonio, 2020. "High-Frequency Trading and Systemic Risk: A Structured Review of Findings and Policies," Review of Economics, De Gruyter, vol. 71(3), pages 169-195, December.
    16. Arumugam, Devika & Krishna Prasanna, P., 2021. "Commonality and contrarian trading among algorithmic traders," Journal of Behavioral and Experimental Finance, Elsevier, vol. 30(C).

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    More about this item

    Keywords

    High-frequency trading; correlated trading strategies; price discovery;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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