Limit Order Placement by High-Frequency Traders

This study, conducted by the University of California and the University of Sydney used a unique dataset consisting of limit order placement, execution, and cancellations on Nasdaq to examine liquidity provision by high-frequency trading (HFT) firms, which is a central issue in the ongoing debates about HFT.

The study shows that HFT firms more effectively use order cancellation to strategically manage their limit orders in anticipation of short-term price movements than non-HFT firms. HFT firms increase their liquidity provision during periods of high volatility; their liquidity provision is less affected by order imbalance shocks than that of non-HFT firms.

Overall, the results indicate that HFT limit orders exert a stabilizing influence on markets.

Read the full study here.

Ultra-Fast Activity and Market Quality

Abstract:

"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."

Click here to find the study.

High-Frequency Trading and Its Role in Fragmented Markets

In this study, conducted by Martin Haferkorn of the Goethe University in Frankfurt, the researchers looked into the effect HFT had on price dispersion in fragmented markets. For this, they compared long term blue chip data from Euronext Paris, Deutsche Boerse and BATS-CHi-X to measure the effect of investments made in IT infrastructure (HFT trading).

The conclusion is that HFT increases market efficiency and that the introduction of the German HFT act increased price dispersion between BATS-Chi-X and Deutsche Boerse in blue chip stocks

Read the full study here

Using sentiment data to develop a trading strategy

In this paper, Ronald Hochreiter of the Vienna University computed trading strategies based on market sentiment derived from the postings of stocktwits, one of the largest social media accounts following the developments on financial markets. It's a very good example of how data from social media can be used to implement trading strategies.

Read the full study here.

Further dissection of the flash crash

In this study the researchers from the university of Nice take a deeper look at the flash crash and conclude that the market is, even without market makers, resilient and favors a recovery. They also conclude that a ban on short-selling reduces short term volatility. Read the full article here

Optimizing a investment strategy based on market capacity

Costs in executing an investment strategy are non linear; the larger a strategy is, the more expensive it becomes to execute (due to liquidity). In this study by the Toulouse School of Economics, the authors research how to measure this capacity and find the optimal equilibrium.

Read the full study here

The role of securities lending

There are many advantages to passive investing. One of the lesser studied advantages is the money that can be earned in securties lending. This study, performed by Blocher & Whaley of the Vanderbilt University outlines it advantages and its effects it has on the choices made by passive investors.
Read the full study here

50 shades of dark pools

In this study, professor Albert Menkveld studies the dark pools and the different forms in which they appear. 

Bringing your volume to a dark pool, reduces your costs but there is a trade-off. It takes longer to execute. Read the full paper here

Study on price pressure and liquidity providing

It's nice when providers of academic research have their own blog to outline and summarize their papers. Albert Menkveld, professor in Finance at the VU in Amsterdam has a let's say "Zen" designed blog and saves us the trouble of writing a long article ourselves. So click here for the abstract from the blog and in there, the related study.

Using web queries to predict equity volume

In a 2012 study conducted by Yahoo, researchers found a correlation between web queries and related equity volumes on exchanges. The research fits well with other studies conducted to discover patterns in social media to predict market movements.

Read the full study at: http://www.plosone.org/article/fetchObject.action?uri=info:doi/10.1371/journal.pone.0040014&representation=PDF