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High‐Frequency Traders and Market Structure
Author(s) -
Menkveld Albert J.
Publication year - 2014
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/fire.12038
Subject(s) - high frequency trading , adverse selection , business , position (finance) , order (exchange) , economics , monetary economics , finance , algorithmic trading
The arrival of high‐frequency traders (HFTs) coincided with the entry of new markets and, subsequently, strong fragmentation of the order flow. These trends might be related as new markets serve HFTs who seek low fees and high speed. New markets only thrive on competitive price quotes that well‐connected HFTs can deliver as they can offload any nonzero position in any market they are connected to. HFTs may benefit or hurt market quality through adverse selection on price quotes, a technology arms race, or high‐risk trading strategies.