Use this URL to cite or link to this record in EThOS:
Title: Is high-frequency trading a threat to financial stability?
Author: Virgilio, Gianluca
ISNI:       0000 0004 6346 5032
Awarding Body: University of Hertfordshire
Current Institution: University of Hertfordshire
Date of Award: 2017
Availability of Full Text:
Access from EThOS:
Access from Institution:
The purpose of this thesis is: (i) to produce an in-depth data analysis and computer-based simulations of the market environment to investigate whether financial stability is affected by the presence of High-Frequency investors; (ii) to verify how High-Frequency Trading and financial stability interact with each other under non-linear conditions; (iii) whether non-illicit behaviours can still lead to potentially destabilising effects; (iv) to provide quantitative support to the theses, either from the audit trail data or resulting from simulations. Simulations are provided to test whether High-Frequency Trading: (a) has an impact on market volatility, (b) leads to market splitting into two tiers; (c) takes the lion's share of arbitrage opportunities. Audit trail data is analysed to verify some hypotheses on the dynamics of the Flash Crash. The simulation on the impact of High-Frequency Trading on market volatility confirms that when markets are under stress, High-Frequency Trading may cause volatility to significantly increase. However, as the number of ultra-fast participants increases, this phenomenon tends to disappear and volatility realigns to its standard values. The market tiering simulation suggests that High-Frequency traders have some tendency to deal with each other, and that causes Low-Frequency traders also to deal with other slow traders, albeit at a lesser extent. This is also a kind of market instability. High-Frequency Trading potentially allows a few fast traders to grab all the arbitrage-led profits, so falsifying the Efficient Market Hypothesis. This phenomenon may disappear as more High-Frequency traders enter the competition, leading to declining profits. Yet, the whole matter seems a dispute for abnormal gains only between few sub-second traders. All simulations have been carefully designed to provide robust results: the behaviours simulated have been drawn from existing literature and the simplifying assumptions have been kept to a minimum. This maximises the reliability of the results and minimizes the potential of bias. Finally, from the data analysis, the impact of High-Frequency Trading on the Flash Crash seems significant; other sudden crashes occurred since, and more can be expected over the next future. Overall, it can be concluded that High-Frequency Trading shows some controversial aspects impacting on financial stability. The results are at a certain extent confirmed by the audit trail data analysis, although only indirectly, since the details allowing the match between High-Frequency traders and their behaviour are confidential and not publicly available Nevertheless, the findings about HFT-induced volatility, market segmentation and sub-optimal market efficiency, albeit not definitive, suggest that careful monitoring by regulators and policy-makers might be required.
Supervisor: Katechos, Georgios ; Schilstra, Maria ; Rughoo, Aarti Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available
Keywords: Arbitrage ; Efficient Market Hypothesis ; Flash Crash ; High Frequency Trading ; Market microstructure ; Market tiering ; Market stability ; Naive orders ; Quote cancellations ; Simulation ; Stop-loss ; Volatility