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Title: Low-latency trading and price discovery: Evidence from the Tokyo stock exchange in the pre-opening and opening periods Authors:  Mario Bellia - SAFE - Goethe University (Germany)
Darya Yuferova - Norwegian School of Economics (Norway) [presenting]
Jun Uno - Waseda University (Japan)
Loriana Pelizzon - SAFE - Goethe University (Germany)
Marti Subrahmanyam - NYU Stern (United States)
Abstract: The aim is to study whether the presence of low-latency traders (including high-frequency traders (HFTs)) in the pre-opening period contributes to price discovery and liquidity provision in the subsequent opening call auction. We empirically investigate these questions using a unique dataset based on server IDs provided by the Tokyo Stock Exchange (TSE), one of the largest stock markets in the world. Our data allow us to develop a more comprehensive classification of traders than in the prior literature, and to investigate the behavior of the different categories of traders, based on their speed of trading and inventory holdings. We find that HFTs dynamically alter their presence in different stocks and on different days; therefore, we focus on HFT activity only when traders utilize their low latency capacity. We find that, in spite of the lack of immediate execution, about one quarter of HFTs participate in the pre-opening period, and significantly contribute to price discovery. They also contribute to liquidity provision in the opening call auction. We also document that HFTs contribute to price discovery and are liquidity consumers during the continuous period. However, this result is driven by the three quarters of HFTs that were inactive in the pre-opening period. In contrast, those that were active in the pre-opening period contribute to liquidity provision in the subsequent continuous session.