High frequency trading and co-movement in financial markets

Laura Malceniece; Kārlis Malcenieks; Tālis Putniņš

doi:10.1016/j.jfineco.2018.02.015

High frequency trading and co-movement in financial markets

Laura Malceniece, Kārlis Malcenieks, Tālis Putniņš^*

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-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 language	English
Pages (from-to)	381-399
Journal	Journal of Financial Economics
Volume	134
Issue number	2
Early online date	24 Mar 2019
DOIs	https://doi.org/10.1016/j.jfineco.2018.02.015
Publication status	Published - 30 Nov 2019

Keywords / Materials (for Non-textual outputs)

commonality
comovement
HFT
high frequency trading
liquidity

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10.1016/j.jfineco.2018.02.015Licence: Creative Commons: Attribution-NonCommercial-NoDerivatives (CC BY-NC-ND)

MalcenieceEtal2019HighFrequencyTradingAndCo-movementInFinancialMarketsAccepted author manuscript, 678 KBLicence: Creative Commons: Attribution-NonCommercial-NoDerivatives (CC BY-NC-ND)

Cite this

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title = "High frequency trading and co-movement in financial markets",

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.",

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AU - Putniņš, Tālis

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N2 - 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.

AB - 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.

KW - commonality

KW - comovement

KW - HFT

KW - high frequency trading

KW - liquidity

U2 - 10.1016/j.jfineco.2018.02.015

DO - 10.1016/j.jfineco.2018.02.015

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JO - Journal of Financial Economics

JF - Journal of Financial Economics

IS - 2

ER -

High frequency trading and co-movement in financial markets

Abstract

Keywords / Materials (for Non-textual outputs)

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