High-Frequency Trading as Viewed through an Electron Microscope. Issue 2 (1st April 2018)

• Record Type: Journal Article
• Authors: Menkveld, Albert J.
• Is Part Of: Financial analysts journal. Volume 74:Issue 2(2018)
• Page Start: 24
• Page End: 31
• Publication Date: 2018-04-01
• Subjects: Investment analysis -- Periodicals; Investment analysis; HW_FM; Periodicals; Electronic journals; 332.6
• DOI: 10.2469/faj.v74.n2.1
• Languages: English
• ISSNs: 0015-198X

Abstract

Abstract : The electron microscope improved our vision by a factor of 1 million, enabling us to see atoms. In this study, I aim for a similar leap by examining trades executed in nanoseconds, a million times more precise than the oft-used milliseconds. This approach allows us to observe asset reallocations among rapid-fire "tradebots, " including those used by high-frequency traders (HFTs). Some 20% of trades occur in submillisecond clusters, which seem to have no price instability. Although submillisecond trade bursts are costly to non-HFTs in terms of adverse selection, these costs can be avoided. Abstract : Disclosure: The author reports no conflicts of interest. Editor's Note Submitted 13 January 2017 Accepted 16 May 2017 by Stephen J. Brown