Title: High-frequency quoting and liquidity commonality
Authors: Riccardo Borghi - Cass Business School (United Kingdom) [presenting]
Abstract: The last years have seen the growth of the high-frequency trader (HFT): a firm that uses proprietary capital to act as market maker on multiple securities engaging in high-frequency quoting (HFQ). The relationship between HFQ and intraday liquidity commonality, i.e. the explanatory power of common liquidity factors on stock liquidity, is investigated to test if HFQ activity increases market interconnectedness. The sample comprises all trades and best quotes' updates for the FTSE100 stocks from January 2010 to December 2014, traded on the London Stock Exchange. An upgrade of the trading systems of the London Stock Exchange on February 2011 is used to identify an exogenous positive shock to HFQ. The empirical results suggest that HFTs are most active before 12pm when stocks are less liquid and market makers are needed the most, while HFQ decreases steadily after 12pm and it is the lowest at the end of the day. Furthermore, liquidity is the highest and the most common at the end of the day, which might suggest the presence of informed market makers. So far, no change in the intraday relationship between HFQ and liquidity commonality has been found after the update of the LSE trading system.