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High-Frequency Trading and Market Performance

Nov 2019
Working Paper
19-033
By  Markus Baldauf, Joshua Mollner
We study the consequences of high-frequency trading (HFT) — and potential policy responses — via the tradeoff between liquidity and information production. Faster speeds facilitate HFT with consequences for this tradeoff: information production diminishes because informed traders have less time to trade before HFTs react, but liquidity (measured by the bid-ask spread) improves because informational asymmetries decline. HFT also pushes outcomes inside the frontier of this tradeoff. However, outcomes can be restored to the frontier by replacing the limit order book (LOB) with either of two alternative mechanisms: delaying all orders except cancellations or frequent batch auctions.
Publication Keywords: 
high-frequency trading
order anticipation
quote fade
latency
information production
bid-ask spread
limit order book
non-cancellation delay
asymmetric delay
speed bump
frequent batch auctions