High‐Frequency Traders and Market Structure

Date01 May 2014
Published date01 May 2014
The Financial Review 49 (2014) 333–344
High-Frequency Traders and
Market Structure
Albert J. Menkveld*
VU University Amsterdam
Duisenberg School of Finance
The arrival of high-frequency traders (HFTs) coincided with the entry of new markets
and, subsequently,strong fragmentation of the order flow. These trends might be related as new
markets serve HFTs who seek lowfees and high speed. New markets only thrive on competitive
price quotes that well-connected HFTs can deliver as they can offload any nonzero position in
any market they are connected to. HFTs may benefit or hurt market quality through adverse
selection on price quotes, a technology arms race, or high-risk trading strategies.
Keywords: high-frequency traders, market fragmentation, market structure
JEL Classification:G10
Corresponding author: Finance Department, VU University Amsterdam, De Boelelaan 1105, 1081 HV
Amsterdam, The Netherlands; Phone: +31 20 598 6130; E-mail: albertjmenkveld@gmail.com.
This paper is based on a driver review report (DR16) written for the 2012 U.K. Government’s Foresight
Project: “The Future of Computer Trading in Financial Markets.” I would like to thank Ian Domowitz,
Stephen Figlewski, Thierry Foucault, two anonymousreferees, Michael Goldstein (guest editor), Terrence
Hendershott, Charles Jones, Oliver Linton, Emiliano Pagnotta, and Bart Yueshen for their feedback. I
gratefully acknowledge VU University Amsterdam for a VU talent grant and NWO for a VIDI grant.
C2014The Eastern Finance Association 333

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT