Does high-frequency trading increase systemic risk?

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 eve...

Full description

Saved in:
Bibliographic Details
Published inJournal of financial markets (Amsterdam, Netherlands) Vol. 31; pp. 1 - 24
Main Authors Jain, Pankaj K., Jain, Pawan, McInish, Thomas H.
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.11.2016
Subjects
Arrowhead
Correlation
CoVaR
High-frequency trading
Liquidity
Systemic risk
High-frequency trading
Correlation
Liquidity
CoVaR
G12
G15
Systemic risk
G14
Arrowhead
Online AccessGet full text

Cover

More Information
Summary: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. •Arrowhead platform introduces high frequency quoting and trading (HFQ & HFT) in Japan.•Current rules and literature do not sufficiently address correlated HFQ & HFT.•CoVAQ and CoVAR measure a stock’s contribution to systemic microstructure risks.•Low latency correlated HFQ and HFT increase systemic microstructure risks.
ISSN:1386-4181
1878-576X
DOI:10.1016/j.finmar.2016.09.004