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ISE Graduate Seminar-The Externalities of High-Frequency Trading

SpeakerAssistant Professor Mao Ye, Department of Finance, University of Illinois
Date Oct 11, 2012
Time 4:00 pm  
Location 103 Transportation Building
Cost Free Event
Sponsor ISE
Contact Holly Michelle Kizer
Phone 217-333-2346
Event type Seminar/Symposium
Views 929
Originating Calendar ISE Seminar Calendar

We show that exogenous technology shocks that increase the speed of trading from microseconds to nanoseconds dramatically increase the order cancellation/execution ratio from 26:1 to 32:1 but do not have any detectable impact on liquidity, price efficiency or trading volume. We find evidence consistent with 'quote stuffing,' which involves submitting an abnormally large number of orders followed immediately by a cancellation to generate order congestion. The stock data are handled by six randomly grouped channels in NASDAQ, and the message flow of a stock can slow down the trading of stocks in the same channel but not stocks in a different channel. We detect an abnormally high level of co-movement of message flow for stocks in the same channel using factor regression and a discontinuity test. Our results suggest that an arms race in speed at the sub-millisecond level is a positional game, where a trader's pay-off depends on her speed relative to other traders. Private benefit then leads to offsetting investments on speed by different high-frequency traders even if there is no social benefit.

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