Ultra-Fast Activity and Market Quality


"We use order and trade messages sent to NASDAQ, every March 2005–2013, to build a measure of ultra-fast activity (UFA) which captures the times when trading algorithms are most active. Our results suggest, quite consistently, that UFA is associated with lower liquidity in stock markets. An increase in UFA leads to greater quoted and effective spreads and lower depth posted in the limit order book. For example, in 2013 we find that a 1 standard deviation increase in our measure of UFA is associated with a 0:13 standard deviation increase in the quoted spread. UFA causes similar increases in effective spreads and also reduces quoted depth. Finally, the effect of UFA is also economically significant. For example, in March 2013 the effect of a one standard deviation in UFA generated on average an increase of between 3 and 6 percent in the quoted spread and effective spreads, as well as a drop of between 3 and 4 percent for depth measured close to the best bid and ask prices."

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