Ye, Mao, Yao, Chen and Gai, Jiading, The Externality of High Frequency Trading (May 25, 2012). Available at SSRN.
“Exogenous technology shocks that increase the speed of trading from microseconds to nanoseconds dramatically increase order cancellation/execution ratio from 26:1 to 32:1 but do not have real impact on liquidity, price efficiency and trading volume. We find evidence consistent with quote stuffing: a manipulative practice that involves submitting a large number of orders with immediate cancellation to generate congestion. The stock data are handled by six randomly grouped channels in NASDAQ, and 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 through factor regression and discontinuity test. These results suggest that investment in speed at the sub-millisecond level may allow high frequency traders to play more complex trading games without a consummate social benefit. ”
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