Stock markets are becoming more and more interconnected due to high frequency traders – Eurasia Review
Over the past twenty years, trading in the stock markets has undergone significant changes. Researchers from the University of Turku and the University of Palermo studied the role of high-frequency traders in the markets.
Technological developments and innovations both in the technology used by the exchanges and in the resources of the traders using their services have made faster trading possible. As a result, high-frequency trading on a sub-millisecond scale has increased.
However, not everyone has the ability to use high frequency trading, and generally scales can range from microseconds to tens of thousands of seconds. The role of high frequency traders has given rise to much debate in recent years.
– On the one hand, people have argued that the presence of high frequency traders makes the markets work more efficiently and reduces trading costs. On the other hand, there have been arguments that this type of trading increases the volatility of the markets, which means a sharp fluctuation in prices, and makes them more prone to crashes, says academic researcher, Docent Jyrki Piilo of the University of Turku.
The researchers used data from the years 2004-2006, 2010-2011 and 2018. During the first decade of this millennium, high-frequency trade was still limited, while in the second decade it declined. widespread due to significant technological advancements. development.
“Using statistical analysis of data and modern methods of network theory, the study allows us to see how the actions of market members and their reactions to the actions of other members have changed over the years,” explains Dr Federico Musciotto from the University. from Palermo.
A market member can trade on their own account or fill commissions for other traders at their request. The study also shows what kind of role high frequency traders have in this transformation.
– Based on the data, we have built the trading networks of the market members, which allows us to detect in which pairs of market members there is a preference to trade with each other and for which pairs it is avoided to trade with each other. In other words, the results show which type of market member has a preference for reacting to the buy or sell order of another type of market member, and which type of market member avoids trading. between them, explains Professor Rosario N. Mantegna of the University of Palermo.
The main result of the study is that markets have become much more interconnected, as trade has become faster thanks to technological development. Networking has increased dramatically over the years – although anonymity in the markets has also increased.
Over the years, there has been a marked increase in the preference for high frequency traders to trade with other types of traders. Instead, high frequency traders avoid mutual trading with each other just like other types of traders. In general, the growing presence of high frequency traders has led to an increased network structure of the market where strong preferential trading patterns between specific pairs of market members can last up to several months.
Made possible by their technological advance and their rapid trading relative to others, high frequency traders have the ability to make strategic trading decisions inaccessible to other market members or investors, and thus significantly influence the liquidity of the markets. .
The network structure of the market and the competition between the members of the market are not necessarily the optimal solutions for the better functioning of the markets.
– The results underline the importance of the debate and further investigations on how to ensure the fair and efficient functioning of the markets, summarizes Mantegna.