market microstructure
Discuss the influence that high frequency trading algorithms have had on asset markets.
The objective of this study is to understand the rapid changes in the asset market as a result of High Frequency Trading. HFT influences various factors such as price, liquidity, welfare etc.
To begin with the basic concept, an asset market is where an individual attains contractual right to a wealth that is either bought or sold. Common examples of assets are stocks, bonds, mortgages etc.
The latest technological advances have revolutionized the way assets are traded. From steps one of trading; i.e. order entry to trading venue and more is now highly automated. This has dramatically reduced the costs incurred by intermediaries. Since there is a reduction in the frictions and cost of trading, this technology has the ability to enable efficient risk sharing, improve liquidity, and facilitate hedging and also to make prices more efficient.
Our market consists of human and algorithmic counterparts that conduct trades based on technical analysis, fundamental analysis and pairs trading strategies. The difference between the two is the speed of trading. A high frequency trading algorithm is a program that is developed to conduct/trade large number of orders at very high speeds. The system uses complex algorithms to analyze multiple markets and execute orders based on market conditions.
Firstly, the agency algorithms are the ones used by institutional traders (mutual funds etc.); mainly to split orders between markets and time to restrain their impact on prices and related risks. The aim of this was to change their long term positions at the lowest transaction cost possible. Secondly, proprietary algorithms were the ones used to take advantage of minor movements in the market. This type of trading facilitated computer power to quickly respond to arbitrage opportunities, mispricing and market signals before they are integrated into an asset market price. As insisted by
The objective of this study is to understand the rapid changes in the asset market as a result of High Frequency Trading. HFT influences various factors such as price, liquidity, welfare etc.
To begin with the basic concept, an asset market is where an individual attains contractual right to a wealth that is either bought or sold. Common examples of assets are stocks, bonds, mortgages etc.
The latest technological advances have revolutionized the way assets are traded. From steps one of trading; i.e. order entry to trading venue and more is now highly automated. This has dramatically reduced the costs incurred by intermediaries. Since there is a reduction in the frictions and cost of trading, this technology has the ability to enable efficient risk sharing, improve liquidity, and facilitate hedging and also to make prices more efficient.
Our market consists of human and algorithmic counterparts that conduct trades based on technical analysis, fundamental analysis and pairs trading strategies. The difference between the two is the speed of trading. A high frequency trading algorithm is a program that is developed to conduct/trade large number of orders at very high speeds. The system uses complex algorithms to analyze multiple markets and execute orders based on market conditions.
Firstly, the agency algorithms are the ones used by institutional traders (mutual funds etc.); mainly to split orders between markets and time to restrain their impact on prices and related risks. The aim of this was to change their long term positions at the lowest transaction cost possible. Secondly, proprietary algorithms were the ones used to take advantage of minor movements in the market. This type of trading facilitated computer power to quickly respond to arbitrage opportunities, mispricing and market signals before they are integrated into an asset market price. As insisted by
References: 7. ‘A Dysfunctional Role of High Frequency Trading in Electronic Markets’, 2011, R. Jarrow, P. Protter 8 9. Menkveld, A., (2011), Foresight Driver Review, Electronic Trading and Market Structure 10