High-frequency quoting, trading, and the efficiency of prices

Jennifer Conrad, Sunil Wahal, Jin Xiang

Research output: Contribution to journalArticle

38 Citations (Scopus)

Abstract

We examine the relation between high frequency quotation and the behavior of stock prices between 2009 and 2011 for the full cross section of securities in the US. On average, higher quotation activity is associated with price series that more closely resemble a random walk, and significantly lower cost of trading. We also explore market resiliency during periods of exceptionally high low-latency trading: large liquidity drawdowns in which, within the same millisecond, trading algorithms systematically sweep large volume across multiple trading venues. Although such large drawdowns incur trading costs, they do not appear to degrade the price formation process or increase the subsequent cost of trading. In an out-of-sample analysis, we investigate an exogenous technological change to the trading environment on the Tokyo Stock Exchange that dramatically reduces latency and allows co-location of servers. This shock also results in prices more closely resembling a random walk and a sharp decline in the cost of trading.

Original languageEnglish (US)
Pages (from-to)271-291
Number of pages21
JournalJournal of Financial Economics
Volume116
Issue number2
DOIs
StatePublished - May 1 2015

Fingerprint

High-frequency trading
Costs
Latency
Random walk
Tokyo Stock Exchange
Liquidity
Co-location
Trading costs
Cross section
Stock prices
Resiliency
Price formation
Technological change

Keywords

  • High frequency trading
  • Market efficiency
  • Market microstructure

ASJC Scopus subject areas

  • Accounting
  • Strategy and Management
  • Economics and Econometrics
  • Finance

Cite this

High-frequency quoting, trading, and the efficiency of prices. / Conrad, Jennifer; Wahal, Sunil; Xiang, Jin.

In: Journal of Financial Economics, Vol. 116, No. 2, 01.05.2015, p. 271-291.

Research output: Contribution to journalArticle

Conrad, Jennifer ; Wahal, Sunil ; Xiang, Jin. / High-frequency quoting, trading, and the efficiency of prices. In: Journal of Financial Economics. 2015 ; Vol. 116, No. 2. pp. 271-291.
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