Sunshine Trading: Flashes of Trading Intent at the Nasdaq

Skjeltorp, Johannes Atle; Sojli, Elvira; Tham, Wing Wah

doi:10.2139/ssrn.2254516

Cited by 4 publications

(2 citation statements)

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“…In fact, several exchanges (e.g. Direct Edge, Bats, and Nasdaq) have at least temporarily facilitated price discrimination via trading speed by introducing so-called " ‡ash orders" (see Skjeltorp et al (2011) for details), a practice that has been banned by the SEC in the meantime. Garvey and Wu (2010) provide more direct evidence by showing that geographical distance to the market center is negatively related to execution speed and positively related to transactions costs.…”

Section: Market Ordersmentioning

confidence: 99%

A dynamic limit order market with fast and slow traders

Hoffmann

2014

Journal of Financial Economics

227

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may Peter HoffmannEuropean Central Bank; e-mail: peter.hoffmann@ecb.europa.eu AbstractWe study the role of high-frequency trading in a dynamic limit order market. Being fast is valuable because it enables traders to revise outstanding limit orders upon news arrivals when interacting with slow market participants. On the one hand, the existence of fast traders can help to reduce the ine¢ ciency that is rooted in the risk of being "picked o¤" after unfavourable price movements and therefore allows more gains from trade to be realized. On the other hand, slow traders face a relative loss in bargaining power which leads them to strategically submit limit orders with a lower execution probability, thereby reducing trade. Due to this negative externality, the equilibrium level of investment is always welfare-reducing. The model generates additional testable implications regarding the e¤ects of high-frequency trading on order ‡ow statistics.Keywords: High-frequency trading, Limit Order Market JEL Classi…cation: G19, C72, D621 Non-Technical SummaryDuring the past decade or so, trading in financial markets has become increasingly automated, with recent estimates suggesting that high-frequency trading (HFT) is now accounting for more than half of all transactions in U.S. equity markets. While the use of information technology for trading purposes is not a recent phenomenon per se, it has become the decisive factor in an industry where the proverb "time is money" is being taken literally and market participants are engaged in an arms race at the millisecond level.This strong growth has ignited a heated debate among academics, practitioners, and regulators about the benefits and concerns associated with an increasing automation of the trading process. While proponents argue that HFT increases market efficiency via improved liquidity and price discovery, critiques claim that at least some of the associated trading strategies are making profits at the expense of other market participants and have the potential to destabilize markets.This paper contributes to the on-going debate by presenting a stylized model of trading in a limit order market where agents differ in their trading speed, which is thought to capture the difference between (fast) HFTs and (slow) human market participants. Following Foucault (1999), we assume that agents' limit orders are subject to the risk of being "picked off" by other traders upon the arrival of new ...

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Section: Market Ordersmentioning

confidence: 99%

A dynamic limit order market with fast and slow traders

Hoffmann

2014

Journal of Financial Economics

227

View full text Add to dashboard Cite

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“…We observe a similar pattern when constructing the cycles for NASDAQ for the same time period. Due to capacity limitations we construct the make/take cycles for only 188 stocks in NASDAQ, seeSkjeltorp, Sojli, and Tham (2012) for more details on the stock selection procedure.Figure A1in the Appendix shows a similar pattern to the BX intraday cycles and the correlation between make and take cycles is 0.94. The NASDAQ cycles are shorter because there is much more quoting and trading activity at the NASDAQ.…”

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confidence: 99%