Jonathan Brogaard, a Ph.D. candidate at Northwestern University’s Kellogg School of Management, who has studied high-frequency trading in great detail, has concluded that high-frequency trading only makes the markets more efficient. Golden Networking‘s High-Frequency Trading Experts Workshop 2010 (http://www.HFTExpertsWorkshop.com), “Practical Implementation of High-Frequency Trading Strategies”, Hong Kong, November 22 & 23 and New York, December 9 & 10, will provide attendees with more details on how high-frequency trading works in practice to generate alpha and make the markets more efficient at the same time.
Mr. Brogaard’s research examines the impact of high frequency trading (HFT) on the U.S. equities market. He analyzed a unique dataset to study the strategies utilized by high frequency traders (HFTs), their profitability, and their relationship with characteristics of the overall market, including liquidity, price discovery, and volatility. The 26 HFT firms in the dataset participate in 73.7% of all trades. According to his research, and contrary to what is believed, HFT increases liquidity in the markets. HFT is an integral part of the price discovery process and price efficiency, he says in his final report. Among his conclusions, he lists:
1. HFTs tend to follow a price reversal strategy driven by order imbalances.
2. HFTs earn gross trading profits of approximately $2.8 billion annually.
3. HFTs do not seem to systematically engage in a non-HFTs anticipatory trading strategy.
4. HFTs’ strategies are more correlated with each other than are non-HFTs.
5. HFTs’ trading level changes only moderately as volatility increases.
6. HFTs add substantially to the price discovery process.
7. HFTs provide the best bid and offer quotes for a significant portion of the trading day and do so strategically so as to avoid informed traders, but provide only one-fourth of the book depth as do non-HFTs.
8. HFTs may dampen intraday volatility. These findings suggest that HFTs’ activities are not detrimental to non-HFTs and that HFT tends to improve market quality.