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on Market Microstructure |
| By: | Martin L. Scholtus (Erasmus University Rotterdam); Dick van Dijk (Erasmus University Rotterdam); Bart Frijns (Auckland University of Technology) |
| Abstract: | This paper documents that speed is crucially important for high frequency trading strategies based on U.S. macroeconomic news releases. Using order level data of the highly liquid S&P500 ETF traded on NASDAQ from January 6, 2009, to December 12, 2011, we find that a delay of 300 milliseconds (1 second) significantly reduces returns by 3.08% (7.33%) compared to instantaneous execution over all announcements in the sample. This reduction is stronger in case of high impact news and on days with high volatility. In addition, we assess the effect of algorithmic trading on market quality around macroeconomic news. Increases in algorithmic trading activity have a positive (mixed) effect on market quality measures when we use algorithmic trading proxies that capture the top of the orderbook (full orderbook). |
| Keywords: | Macroeconomic News, High Frequency Trading, Latency Costs, Market Activity, Event-Based Trading |
| JEL: | E44 G10 G14 |
| Date: | 2012–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012121&r=mst |
| By: | Johannes A. Skjeltorp (Norges Bank); Elvira Sojli (Erasmus University Rotterdam, Duisenberg school of finance); Wing Wah Tham (Erasmus University Rotterdam) |
| Abstract: | We use the introduction and the subsequent removal of the flash order facility (an actionable indication of interest, IOI) from the NASDAQ as a natural experiment to investigate the impact of voluntary disclosure of trading intent on market quality. We find that flash orders significantly improve liquidity in the NASDAQ. In addition, overall market quality improves substantially when the flash functionality is introduced and deteriorates when it is removed. One explanation for our findings is that flash orders are placed by less informed traders and fulfill their role as an advertisement of uninformed liquidity needs. They successfully attract responses from liquidity providers immediately after the announcement is placed, thus lowering the risk-bearing cost for the overall market. Our study is important in understanding the impact of voluntary disclosure, in guiding future market design choices, and in the current debate on dark pools and IOIs. |
| Keywords: | Actionable Indication of Interest (IOI); Flash orders; High-frequency Trading |
| JEL: | G10 G20 G14 |
| Date: | 2012–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012141&r=mst |
| By: | Martin Scholtus (Erasmus University Rotterdam); Dick van Dijk (Erasmus University Rotterdam) |
| Abstract: | This paper investigates the importance of speed for technical trading rule performance for three highly liquid ETFs listed on NASDAQ over the period January 6, 2009 up to September 30, 2009. In addition we examine the characteristics of market activity over the day and within subperiods corresponding to hours, minutes, and seconds. Speed has a clear impact on the return of technical trading rules. For strategies that yield a positive return when they experience no delay, a delay of 200 milliseconds is enough to lower performance significantly. On low volatility days this is already the case for delays larger than 50 milliseconds. In addition, the importance of speed for trading rule performance increases over time. Market activity follows a U-shape over the day with a spike at 10:00AM due to macroeconomic announcements and is characterized by periodic activity within the day, hour, minute, and second. |
| Keywords: | Technical Trading, High-Frequency Trading, Latency Costs, Trading Speed, Market Activity |
| JEL: | G10 G14 G20 |
| Date: | 2012–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012018&r=mst |