Johannes Breckenfelder, 17 December 2020

High-frequency trading has increased rapidly since the mid-2000s, and now represents about 50% of trading volume in US equity markets and between 24% and 43% in European equity markets. This column explores empirically whether increased competition among high-frequency traders has adverse effects on market liquidity. It exploits a European tick size reform which led to more competition among high-frequency trades for certain groups of stock, and finds an adverse effect on market liquidity. The negative effect is driven by increased use of speculative trading strategies if competition increases.

CEPR Policy Research