Enhancing liquidity in Emerging Market Exchanges

This is a study by the World Federation of Exchanges in cooperation with consulting firm Olivier Wyman.

The report, entitled Enhancing Liquidity in Emerging Market Exchanges, is designed to provide regulators and exchange operators in emerging markets with ideas around how to grow and enhance market liquidity - liquidity levers - and a potential framework for which of those levers may work best at which stage of market development. Many emerging markets suffer from low levels of liquidity, effectively placing a constraint on economic and market development. Liquidity is positively associated with broader market development, and often creates a virtuous circle, resulting in encouraging effects for the underlying economy.

Read the full report here

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.

HFT around large II orders

When high-frequency traders (HFTs) enter markets, the bid-ask spread declines. Several academic studies have reported such a result. Investors pay less for each market order they send. All good and everyone happy. 

Everyone?

Vincent van Kervel and Albert J. Menkveld have done the research and present the facts in a well written paper. There is also the blog by Albert Menkveld This paper is good, and often much needed, factual input for discussions about market structure.

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.

Testing a HFT model in a limit orderbook

In this paper from the Stanford University, the researchers tested the HFT market making model by Avellaneda and Stoikov in a limit order book.

Read the full study here

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

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.