Occasional Paper No. 50: Quantifying the High-Frequency Trading 'Arms Race': A new methodology and estimates

The authors use stock exchange message data to quantify the negative aspect of high-frequency trading, known as 'latency arbitrage.' The key difference between message data and widely-familiar limit order book data is that message data contain attempts to trade or cancel that fail.

Occasional Paper No.50 (PDF)

Appendix (PDF)

Summary

The authors use stock exchange message data to quantify the negative aspect of high-frequency trading, known as “latency arbitrage.” The main results show:

  • races are frequent, fast and worth only small amounts per race
  • a large proportion of daily trading volume is in races
  • race participation is concentrated
  • in aggregate, these small races make up a meaningful proportion of price impact
  • in aggregate, these small races add up to meaningful harm to liquidity
  • in aggregate, these small races add up to a meaningful total ‘size of the prize’
  • The paper finds that while there is only a small detriment per transaction as a result, it adds up to a 17% reduction in the cost of liquidity and $5bn a year in tax on trading volume.

Authors

Matteo Aquilina, Financial Conduct Authority, Eric Budish, University of Chicago Booth School of Business and NBER and Peter O’Neill, Financial Conduct Authority

Disclaimer

Occasional Papers contribute to the work of the FCA by providing rigorous research results and stimulating debate. While they may not necessarily represent the position of the FCA, they are one source of evidence that the FCA may use while discharging its functions and to inform its views. The FCA endeavours to ensure that research outputs are correct, through checks including independent referee reports, but the nature of such research and choice of research methods is a matter for the authors using their expert judgement. To the extent that Occasional Papers contain any errors or omissions, they should be attributed to the individual authors, rather than to the FCA.