Dr. PK Jain presents his research on high frequency trading
For release: January 6, 2015
Dr. Pankaj (PK) Jain, chairman of the Department of Finance, Insurance, and Real Estate, recently presented his research on the speed of high frequency trading (HFT) at the US Commodity Futures Trading Commission (CFTC), the US Securities and Exchange Commission (SEC), and the Western Finance Association (WFA). His coauthors also presented the paper at the Swiss Society for Financial Market Research (SGF) in Switzerland, the Financial Intermediation Research Society (FIRS) in Canada, and the BlackRock Inc. conference in California. His coauthors include Dr. Bidisha Chakrabarty from St. Louis University, Dr. Andriy Shkilko from the Financial Services Research Centre in Ontario, Canada, and Konstantin Sokolov from Wilfrid Laurier University.
Their research tests recent HFT theories which predict that when some traders use naked market access to exchanges (potentially without protective compliance checks) in order to react to new information at faster lightning speeds, they adversely select slower liquidity suppliers in financial markets. This, in turn, increases trading costs for liquidity demanders and general investors. Using the SEC’s ban on naked market access – a regulation that slowed down some traders – this paper empirically confirms this prediction. Post ban, trading costs decline, largely driven by reduced adverse selection. Quoted spreads narrow, order life increases, and liquidity migrates from the outer order book layers to the inner layers. Although short-term price efficiency declines, longer-term price efficiency remains unchanged. A liquidity-demanding investor who seeks to trade at a low cost and at an efficient price derives a net benefit from naked access ban.