Quantifying the High-Frequency Trading “Arms Race”
Quantifying the High-Frequency Trading “Arms Race”
Coauthors: Matteo Aquilina and Peter O'NeillThe Quarterly Journal of Economics, (2022): 137, no. 1, 493-564. [PDF]
Abstract
We use stock exchange message data to quantify the negative aspect of high-frequency trading, known as “latency arbitrage.” The key difference between message data and widely-familiar limit order book data is that message data contain attempts to trade or cancel that fail. This allows the researcher to observe both winners and losers in a race, whereas in limit order book data you cannot see the losers, so you cannot directly see the races. We find that latency-arbitrage races are very frequent (about one per minute per symbol for FTSE 100 stocks), extremely fast (the modal race lasts 5-10 millionths of a second), and account for a large portion of overall trading volume (about 20%). Race participation is concentrated, with the top 6 firms accounting for over 80% of all race wins and losses. Most races (about 90%) are won by an aggressive order as opposed to a cancel attempt; market participants outside the top 6 firms disproportionately provide the liquidity that gets taken in races (about 60%). Our main estimates suggest that eliminating latency arbitrage would reduce the market’s cost of liquidity by 17% and that the total sums at stake are on the order of $5 billion annually in global equity markets.
Awards
Winner — WFA 2020 Two Sigma Award for Best Paper on Investment Management
Appendices
Data and Code Appendix
Matteo Aquilina and Peter O'NeillThe Quarterly Journal of Economics, [PDF]
Earlier Versions
FCA Occasional Paper landing page with brief summary and links
Coauthors: Matteo Aquilina and Peter O'NeillFinancial Conduct Authority, Occasional Paper No. 50: Quantifying the High-Frequency Trading 'Arms Race'.
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FCA Insight Brief Description of “Quantifying the High-Frequency Trading ‘Arms Race'”
Coauthors: Matteo Aquilina and Peter O'NeillInsight, Big Bucks from Small Change, January 2020.
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UK Financial Conduct Authority Occasional Paper 50
Coauthors: Matteo Aquilina and Peter O'NeillFinancial Conduct Authority, "Quantifying the High-Frequency Trading Arms Race".
[PDF] [All Related Material]
Slides
Seminar slides
[PDF]Press Coverage
Money Stuff: Latency Arbitrage
Bloomberg, Matt Levine, Jan 28, 2020 [PDF]
FCA Researchers Outline $5bn ‘Tax’ Imposed by High-Speed Trading
Financial Times, Philip Stafford, Jan 27, 2020 [PDF]
Ultrafast Trading Costs Stock Investory Nearly $5 Billion a Year, Study Says
Wall Street Journal, Alexander Osipovich, Jan 27, 2020 [PDF]Video
Quantifying the High-Frequency Trading ‘Arms Race’: A new methodology and estimates
Matteo Aquilina and Peter O'NeillThe Microstructure Exchange, June 16, 2020.
Code