Who Let The Bots Out? Market Quality in a High Frequency World (Credit Suisse)

March 2012

KEYWORDS: High-Frequency Trading, ETF, Designated Market Makers, Flash Crash, Volatility, NBBO, bid-ask spread, index, Nasdaq, DirectEdge

Authors:

Ana Avramovic

Organizations:
  • Credit Suisse

Summary:

Technological advances have dramatically altered our markets in just a few short years. But have these changes been good for trading? Has market quality degraded, or has the structure simply changed?

Rather than criticizing or defending high frequency trading, we present an objective analysis of our current market structure. Among the factors considered:

  • Are markets more volatile than they used to be?
  • Has the probability of another flash crash increased?
  • What is the impact on bid-ask spreads and posted size?
  • Given that quote traffic has increased, does it represent real liquidity?

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