High-Frequency Trading: 

The Academic Evidence

Joel Hasbrouck

Stern School of Business, NYU

1
Overview and summary

 Most analyses are based on equity markets.

 Broad characteristics of HFTrs

 Large in size and scope (market coverage)

 Collocate.

 A large share of message traffic.

 Quick reaction to market information.

 Trading styles

 High rates of order cancellation

 High turnover

 Tight position management: net positions are always 

kept small

 Often trade passively (like market makers)

 But often trade actively.

2
Kirilenko, Andrei A., Albert S. Kyle, Mehrdad

Samadi, and Tugkan Tuzun, 2010, 

The flash crash: The impact of high frequency 

trading on an electronic market

 Market: E-Minis

 May 6: HFTrs didn’t trigger it, but they 

contributed to it.

 In normal times, HFTrs

 Behave like market makers

 Low inventories, high turnover

 But trade more actively than “traditional MMs”

3
Menkveld, Albert J., 2012, 

High frequency trading and the new-market makers

 Market: Chi-X (European equities)

 Dominated by one large HFTr

 Spreads dropped with the entry of the HFTr

 HFTr makes the bulk of its profits on positions 

held five seconds or less.

 80% of its trades are passive

4
Hasbrouck, Joel, and Gideon Saar, 2011,

Low-latency trading

 500 stocks on Nasdaq’s Inet system.

 Measure HF activity by measuring automated 

cancel-and-replace orders in the book.

 Increased HF activity “causes”

 lower posted and effective spreads

 Lower short-term volatility

 Increased depth

5
The Nasdaq HFT dataset

 Constructed by BATS and Nasdaq, made generally 

available

 120 US equities over 2008-2009

 HFTs identified by exchanges as proprietary 

traders with collocated facilities, high turnover, 

high rates of cancellations (relative to executions), 

etc.

 Data record all trades and quotes prevailing at the 

times of the trades.

6
Brogaard, Jonathan, 2010, 

The activity of high frequency traders

 HFTrs involved in 68% of dollar volume 

(sometimes on both sides)

 They’re demanding liquidity in 43% of DV, 

supplying it in 41%.

 Their strategies are correlated.

 Some evidence that they can predict future order 

flow.

7
Brogaard, Jonathan, 2012, 

High frequency trading and volatility

 Increased index volatility  increased active HFT

 Increased stock-specific volatility  reduced 

active HFT

 Increased HFT  reduced volatility

8
Hendershott, Terrence J., and Ryan Riordan, 2012, 

High frequency trading and price discovery

 HFTrs active trades anticipate subsequent price 

movements.

 Their trading enhances price discovery and 

market efficiency.

 “Prices reflect information more quickly”

9
Summary of empirical studies

 HFT seems to be benign/beneficial.

 Limitations

 With respect to what information does 

HFT increase efficiency?

 Studies characterize average markets in 

typical times.

Don’t address stability and abnormal 

volatility.

10
The contribution of HFT to efficiency

 A market is more efficient when prices reflect 

information sooner.

 Principle based on fundamental information.

 We require firms to report promptly 

material developments.

 What is the value of efficiency when 

information is an advance signal of another 

player’s pending order?

 Jarrow, Robert A., and Philip Protter, 2011,

A dysfunctional role of high frequency trading 

in electronic markets

11
HF behavior: the pathological

 We observe ...

 Volatility in bids and offers

 Sudden extreme surges in message traffic 

 ... without apparent fundamental cause

12
13
Submissions and cancellations

0

100

200

300

12:10:00 12:12:00 12:14:00 12:16:00 12:18:00 12:20:00

Cumulative executions

0

10

20

30

40

GNTX on June 12, 2008, 12:10pm to 12:20pm 

14