High-Frequency Trading in Scandinavia - The Academic’s View (Björn Hagströmer)
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A presentation at The 2015 Copenhagen Business School Symposium on High-Frequency Trading. Björn Hagströmer, Associate Professor in Finance at Stockholm Business School, Stockholm University
High-Frequency Trading in Scandinavia - The Academic’s View (Björn Hagströmer)
- 2. 0 10 20 30 40 2010 2011 2012 2013 2014 Realized volatility 0 5 10 15 20 2010 2011 2012 2013 2014 Order traffic 0 2 4 6 8 2010 2011 2012 2013 2014 Bid‐ask spread 0,0 0,5 1,0 1,5 2,0 2,5 2010 2011 2012 2013 2014 Fragmentation Aug 2011: We have a problem Squared 10‐second returns (sq. bps) Halfspread relative midpoint (bps) # orders / # trades Fragmentation index (range 1‐5) Björn Hagströmer, Stockholm Business School
- 3. 0 10 20 30 40 2010 2011 2012 2013 2014 Realized volatility 0 5 10 15 20 2010 2011 2012 2013 2014 Order traffic 0 2 4 6 8 2010 2011 2012 2013 2014 Bid‐ask spread 0,0 0,5 1,0 1,5 2,0 2,5 2010 2011 2012 2013 2014 Fragmentation Aug 2011: We have a problemOct 2015: Do we have a problem? Squared 10‐second returns (sq. bps) Halfspread relative midpoint (bps) # orders / # trades Fragmentation index (range 1‐5) Björn Hagströmer, Stockholm Business School
- 4. 1. The Diversity of High‐Frequency Traders How do HFT strategies affect volatility? 2. Trading Fast and Slow: Colocation and Liquidity How does trading speed affect liquidity? 3. High‐Frequency Trading Around Large Institutional Orders How do HFTs affect the execution costs for institutions? Three studies on HFT in Scandinavia Björn Hagströmer, Stockholm Business School
- 6. HFT 26% Hybrids algo 18% Hybrids non‐ algo 22% Non‐HFT non‐algo 30% Non‐HFT algo 4% 48% AT volume (AUTD) 26% pure HFT (broadly defined) Many definitions of HFT exist Order‐to‐trade ratios Latency Many exchange members employ manual trading, AT and HFT parallel AT/HFT market share in OMX S30 stocks (Feb 2012, SEK trading volume) Björn Hagströmer, Stockholm Business School
- 7. Market making presence How often does each HFT have an order posted at the BBO? Snapshots of the order book every 10 seconds Check in each stock which MPIDs are on the BBO Calculate the % of snapshots where a MPID is present at the BBO HFTs Proprietary trading only Arbitrage strategies Directional strategies Market making Distinguishing market makers from other HFTs Björn Hagströmer, Stockholm Business School
- 9. 70% 0% Market makers Other HFTs Market presence (% of time at BBO) 63% 86% 37% 14% Transactions Limit orders Share of HFT message traffic Market makers Other HFTs Market makers vs. other HFTs Björn Hagströmer, Stockholm Business School
- 10. 90 95 100 105 110 20 Feb 21 Feb 22 Feb 23 Feb 24 Feb 27 Feb 28 Feb 29 Feb 1 Mar 2 Mar 5 Mar 6 Mar 7 Mar 8 Mar 9 Mar Sandvik 2012 Event date After dateBefore date Event date: A day when the closing price breaks through a tick size level E.g., Price SEK 101 SEK 99 changes tick SEK 0.10 SEK 0.05 Before date: Last date before the event with all prices on one side of the limit After date: First date after the event with all prices on the other side of the limit How is volatility affected by HFT? Björn Hagströmer, Stockholm Business School
- 11. 11.6% 1.1% 2010 2011‐12 Changes in volatility when tick size increases ‐44% ‐41% 16% ‐50% ‐25% 0% 25% Opp HFT (2010) Opp HFT (2011‐ 12) Market makers (2011‐12) Changes in HFT market share when tick size increases How is volatility affected by HFT activity? Björn Hagströmer, Stockholm Business School
- 13. Basic colo Premium colo 10G colo Trader group Date of introduction Basic colocation Feb 8, 2010 Premium colocation Mar 14, 2011 10G colocation Sep 17, 2012 Colocation at NASDAQ OMX Nordic Non‐colo Björn Hagströmer, Stockholm Business School
- 14. What fast traders do 17% 2% 27% 55% Limit orders NonColo BasicColo PremiumColo 10GColo 56% 4% 19% 22% Trades NonColo BasicColo PremiumColo 10GColo Björn Hagströmer, Stockholm Business School
- 16. Changes in market liquidity Four weeks before vs four weeks after the colocation upgrade ‐1,9% +8.7% ‐2,7% NA +1.1% +3.1% +2.5% +0.5% NASDAQ OMX S30 NASDAQ OMX S30 Slow traders OMXS 30 index futures Euronext 100 matched sample Bid‐ask spreads Depth Björn Hagströmer, Stockholm Business School
- 20. • Most academic studies find that HFT is good for market quality in the short term • Remaining issues • Is the level of technology investments sustainable in the long‐ term? • Fast trading and fragmentation leads to high market complexity. How is best execution for clients influenced by this environment? Conclusion Björn Hagströmer, Stockholm Business School