Does high-frequency trading increase systemic risk?
Abstract
In 2010, the Tokyo Stock Exchange, the largest stock exchange headquartered outside of the United States, introduced a new trading platform, Arrowhead. This platform reduced latency and increased co-located, high-frequency quoting and trading (HFQ) from zero to 36% of trading volume. During tail events representing extreme market conditions, low-latency correlated HFQ may lead to systemic risks such as flash crashes, which has not been sufficiently addressed in the literature. In this paper, our study provides a framework to assess whether HFQ increases systemic risks and points to the need for incorporating correlations and CoVaR methods in regulating these risks through circuit breakers and other regulations.
Publication Title
Journal of Financial Markets
Recommended Citation
Jain, P., Jain, P., & McInish, T. (2016). Does high-frequency trading increase systemic risk?. Journal of Financial Markets, 31, 1-24. https://doi.org/10.1016/j.finmar.2016.09.004
