High frequency trading and co-movement in financial markets

Laura Malceniece, Kārlis Malcenieks, Tālis Putniņš

Research output: Contribution to journalArticlepeer-review

Abstract

Using the staggered entry of Chi-X in 12 European equity markets as a source of exogenous variation in high frequency trading (HFT), we find that HFT causes significant increases in comovement in returns and in liquidity. About one-third of the increase in return comovement is due to faster diffusion of market-wide information. We attribute the remaining two-thirds to correlated trading strategies of HFTs. The increase in liquidity comovement is consistent with HFT liquidity providers being better able to monitor other stocks and adjust their liquidity provision accordingly. Our findings suggest a channel by which HFT impacts the cost of capital.

Original languageEnglish
Pages (from-to)381-399
JournalJournal of Financial Economics
Volume134
Issue number2
Early online date24 Mar 2019
DOIs
Publication statusPublished - 30 Nov 2019

Keywords

  • commonality
  • comovement
  • HFT
  • high frequency trading
  • liquidity

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