Ultra-Fast Activity and Market Quality
Seminar Room 2, Newton Institute Gatehouse
This paper analyses the relationship between ultra-fast activity taking place in the stock market, and different dimensions of market quality. For us "ultra-fast activity" includes the actions of both high-frequency proprietary trading as well as automated buy- and sell-side
algos. In order to measure this ultra-fast activity empirically we define a new measure, which uses information on messages sent to the exchange, We then, use this measure as proxy for ultra-fast activity, and analyze its relationship with standard measures of market quality, during the month of march for every year between 2005 and 2011 (inclusive). Our analysis finds evidence that higher ultra-fast activity is associated with lower market quality: less depth in limit order book, higher effective spreads, and higher quoted spreads.