High Frequency Market Microstructure - A Comprehensive Overview
Delve into the intricate world of high-frequency market microstructure with a detailed exploration of how traders operate, market structures, regulatory influences, and the evolution of trading platforms. Uncover the birth of High-Frequency Trading (HFT), the strategies employed by high-frequency traders, and the impact on non-high-frequency traders and retail traders. Examine the role of technology, regulatory issues, market linkages, and the concept of fairness in this dynamic landscape.
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Presentation Transcript
High Frequency Market Microstructure Author: Maureen O Hara Presented by: Xingyi Zhou Topics in Quantitative Finance 1 9/11/2024
Outline The New High Frequency World The way traders trade High frequency trader Non high frequency trader (everyone else) The way markets are structured The role of regulatory change The organization of trading Exchange pricing models Order priority rules The development of new trading platforms Enjoying a quiet life 2 9/11/2024
Introduction Gaps in Microstructure Research for High Frequency Trading Information Market data Analyzing data Regulatory and Policy Issues needing further study Market linkages Issue of Fairness Enjoying a quiet life 3 9/11/2024
Birth of HFT Market fragmentation Regulation Arbitrage Technology Enjoying a quiet life 4 9/11/2024
High Frequency Trader Speed Done by Computer Strategy Based Markets matching engine HFT market making (only on one side of the book in each stock) Complex opportunistic algorithms (TWAP, Momentum ignition strategy) Predatory algorithms (manipulate price) Enjoying a quiet life 5 9/11/2024
Non-high frequency traders Speed trade is now fast for every one Done by Computer Supply and demand liquidity Strategy Based Dark Trading (smaller sizes) Enjoying a quiet life 6 9/11/2024
Non-high frequency traders Enjoying a quiet life 7 9/11/2024
Retail Traders Largely via broker-dealer firms DMMs(designated marker makers) and SLPs(strategic liquidity providers) trading costs declined Enjoying a quiet life 8 9/11/2024
Exchanges and Other Markets Dilemma-ending of one size fits all Different order type Access and Speed Market Pricing Structure Maker-taker Taker-maker Subscription market Enjoying a quiet life 9 9/11/2024
Changes in Microstructure Information Asset and time related Turns public information into private information Trade imbalance Market data Sequence of trade becomes informative Trading intentions and trades executed can be very different No relation between order balance and high-low price Data analysis Consolidated tape: data could be out of order Empirical analyses using quote data Market dynamics (realized spread) VPIN(weighted probability of informed trading) Enjoying a quiet life 10 9/11/2024
Research and the Regulatory Agenda Market linkages Trade through rule Trade at The issue of fairness Should exchanges be allowed to offer specialized order types targeted at high frequency traders? Should exchanges be allowed to offer colocation for a fee? Is it fair for exchanges to sell some traders information before it is available to others? Enjoying a quiet life 11 9/11/2024
Thank you! Enjoying a quiet life 12 9/11/2024
