High-Frequency Trading and Market Performance

Markus Baldauf, Joshua Mollner*

*Corresponding author for this work

Research output: Contribution to journalArticle

4 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 languageEnglish (US)
Pages (from-to)1495-1526
Number of pages32
JournalJournal of Finance
Volume75
Issue number3
DOIs
StatePublished - Jun 1 2020

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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