High‐frequency trading order cancellations and market quality: Is stricter regulation the answer?. (26th July 2020)

• Record Type: Journal Article
• Authors: Manahov, Viktor
• Is Part Of: International journal of finance & economics. Volume 26:Number 4(2021)
• Page Start: 5385
• Page End: 5407
• Publication Date: 2020-07-26
• Subjects: high‐frequency trading -- limit order cancellation -- market efficiency -- market regulation; International finance -- Periodicals; Economics -- Periodicals; 332
• DOI: 10.1002/ijfe.2071
• Languages: English
• ISSNs: 1076-9307

Abstract

Abstract: High‐frequency traders (HFTs) frequently submit, cancel and resubmit trading orders in an attempt to stay in front of the queue. This study shows that HFTs cancel a large number of limit orders within 50 ms in order to create arbitrage opportunities in the Australian Stock Exchange (ASX). We find that HFTs generate substantial profits after transaction costs and are capable of extending their strong profitability generating record in the future. Our empirical results indicate that institutional investors lacking speed are more likely to experience higher execution costs. We propose the introduction of batch auctions, one per 50 ms of trading, to impose a queuing risk for HFTs leading to positive market quality effects.