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By Jonathan A. Brogaard, Thomas Brennan, Robert Korajczyk, Robert Mcdonald and Annette Vissing-jorgensen


for the considerable amount of time they have spent discussing this topic with me; the Zell Center for Risk Research for its financial support; and the many faculty members and PhD students at the Kellogg School of Management, Northwestern University and at the Northwestern University School of Law for assistance on this paper. Please contact the author before In this paper I examine the impact of high frequency trading (HFT) on the U.S. equities market. I analyze a unique dataset to study the strategies utilized by high frequency traders (HFTs), their profitability, and their relationship with characteristics of the overall market, including liquidity, price discovery, and volatility. The 26 HFT firms in the dataset participate in 68.5 % of the dollar-volume traded. I find the following key results: (1) HFTs tend to follow a price reversal strategy driven by order imbalances, (2) HFTs earn gross trading profits of approximately $2.8 billion annually, (3) HFTs do not seem to systematically engage in a non-HFTr anticipatory trading strategy, (4) HFTs ’ strategies are more correlated with each other than are non-HFTs’, (5) HFTs ’ trading levels change only moderately as volatility increases, (6) HFTs add substantially to the price discovery process, (7) HFTs provide the best bid and offer quotes for a significant portion of the trading day and do so strategically so as to avoid informed traders, but provide only one-fourth as much book depth as non-HFTs, and (8) HFT

Year: 2010
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