Low-latency trading |
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Authors: | Joel Hasbrouck Gideon Saar |
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Affiliation: | 1. Stern School of Business, 44 West 4th Street, New York, NY 10012, USA;2. Johnson Graduate School of Management, Cornell University, 455 Sage Hall, Ithaca, NY 14853, USA |
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Abstract: | We define low-latency activity as strategies that respond to market events in the millisecond environment, the hallmark of proprietary trading by high-frequency traders though it could include other algorithmic activity as well. We propose a new measure of low-latency activity to investigate the impact of high-frequency trading on the market environment. Our measure is highly correlated with NASDAQ-constructed estimates of high-frequency trading, but it can be computed from widely-available message data. We use this measure to study how low-latency activity affects market quality both during normal market conditions and during a period of declining prices and heightened economic uncertainty. Our analysis suggests that increased low-latency activity improves traditional market quality measures—decreasing spreads, increasing displayed depth in the limit order book, and lowering short-term volatility. Our findings suggest that given the current market structure for U.S. equities, increased low-latency activity need not work to the detriment of long-term investors. |
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Keywords: | High-frequency trading Limit order markets NASDAQ Order placement strategies Liquidity Market quality |
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