Study highlights how price discovery in the world’s biggest market (the US market), affects HFT and UK liquidity. Following on from their recent research that shows HFT is the main supplier of liquidity during major macroeconomic announcements on the UK’s FTSE 100, Kiril Alampieski and Andrew Lepone conduct another study looking at HFT in the UK market during the commencement of US trading in New York. Using the extremely large and unique dataset provided by the Financial Services Authority (FSA) from the London Stock Exchange, CHI-X Europe and BATS Europe, the study looks at identifying how HFT in their varying roles as market makers and arbitrageurs affect price discovery and liquidity during 30 trading days in 2010. London is five hours ahead of New York which means that the UK market is in the rare position of being open (commencing at 2.30pm) when US trading in New York begins for the day. The significance of this can be measured by the fact that the majority of the UK’s equity volume is actually executed during the overlapping trading hours of London and New York. This study analyses the effect on HFT participation in the national order book for all stocks in the FTSE 100 which includes 22 stocks which are cross-listed in the US. These cross-listed stocks are very important for research as they allow observations to be made on fungible (interchangeable) stocks during the same trading time. The extensive study provides evidence that average HFT depth at the best bid and asks quotes for both cross-listed and non-cross-listed stocks increases signifi- cantly after the commencement of US trading compared to other traders (OT) who experience a broad decline, while time for both spent at the best bid and ask quotes increases. Examination of trading participation shows that HFT participation is significantly higher across all stocks while OT is lower. The results also demonstrate that HFT proportional liquidity supply is higher across all stocks while HFT liquidity demand is higher for cross-listed but lower for non-cross-listed stocks. The study analyses how concurrent price discovery (the price of an equity which is based upon basic supply and demand factors of the market) in the US and UK has an effect on HFT participation for both cross-listed and non-cross-listed stocks. Results find that HFT increase their participation in trades and consolidate their latent liquidity supply in the UK market in light of price discovery from the US market.
Author(s): Kiril Alampieski , Andrew Lepone