High-Frequency Trading and Market Performance

Markus Baldauf; Joshua Mollner

doi:10.1111/jofi.12882

High-Frequency Trading and Market Performance

Markus Baldauf, Joshua Mollner^*

^*Corresponding author for this work

Managerial Economics, Decision Sciences and Operations

Research output: Contribution to journal › Article › peer-review

49 Scopus citations

Abstract

We study the consequences of, and potential policy responses to, high-frequency trading (HFT) via the tradeoff between liquidity and information production. Faster speeds facilitate HFT, with consequences for this tradeoff: Information production decreases because informed traders have less time to trade before HFTs react, but liquidity (measured by the bid-ask spread) improves because informational asymmetries decline. HFT also pushes outcomes inside the frontier of this tradeoff. However, outcomes can be restored to the frontier by replacing the limit order book with one of two alternative mechanisms: delaying all orders except cancellations or implementing frequent batch auctions.

Original language	English (US)
Pages (from-to)	1495-1526
Number of pages	32
Journal	Journal of Finance
Volume	75
Issue number	3
DOIs	https://doi.org/10.1111/jofi.12882
State	Published - Jun 1 2020

ASJC Scopus subject areas

Accounting
Finance
Economics and Econometrics

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10.1111/jofi.12882

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High-Frequency Trading and Market Performance

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