Open AccessThe adaptive market hypothesis and high frequency trading
Author(s) -
Meng Ke,
Shouhao Li
Publication year - 2021
Publication title -
plos one
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.99
H-Index - 332
ISSN - 1932-6203
DOI - 10.1371/journal.pone.0260724
Subject(s) - high frequency trading , market efficiency , efficient market hypothesis , order (exchange) , argument (complex analysis) , market microstructure , economics , econometrics , limit (mathematics) , financial economics , monetary economics , microeconomics , algorithmic trading , mathematics , biology , finance , paleontology , mathematical analysis , biochemistry , horse , stock market
This paper uses NASDAQ order book data for the S&P 500 exchange traded fund (SPY) to examine the relationship between one-minute, informational market efficiency and high frequency trading (HFT). We find that the level of efficiency varies widely over time and appears to cluster. Periods of high efficiency are followed by periods of low efficiency and vice versa. Further, we find that HFT activity is higher during periods of low efficiency. This supports the argument that HFTs seek profits and risk reduction by actively processing information, through limit order additions and cancellations, during periods of lower efficiency and revert to more passive market-making and rebate-generation during periods of higher efficiency. These findings support the argument that the adaptive market hypothesis (AMH) is an appropriate description of how prices evolve to incorporate information.