The role of HFT in Order Book Resiliency

This paper from the Goethe institute in Frankfurt explores limit order book resiliency following liquidity shocks in the presence of high-frequency trading firms.

Based on a unique data set that enables the identification of orders submitted by algorithmic traders and subscribers of co-location services, they studied whether high-frequency traders are involved in the reconstruction of the order book.

The researchers analyzed order submission and deletion activity before and after a liquidity shock initiated by a large market order. The results show that exclusively HFT reduces the spread within the first seconds after the market impact making use of their speed advantage. However, liquidity recovery in terms of order book depth takes significantly longer and is accomplished by human traders' submission activity only.

Read the full study here