High-frequency trading: Effect on market volatility

Bank of Russia experts have estimated the effect of high-frequency trading on financial market parameters when intraday volatility is elevated.

The interest in high-frequency trading (HFT) is down to its significant role in organised trading. That said, the effect of the volatility level on the level of activity of HFT participants has not been explored yet.

Market volatility is an important feature that largely determines the level of uncertainty for participants and affects market attractiveness for investors.

To study the issue the researchers took a two-week period in January-February 2017. They analysed the actions of HFT participants in the organised trading in the most liquid financial instruments at the foreign exchange, stock and derivatives markets of the Moscow Exchange. They also assessed the effects of high frequency of order placement or cancellation by this group of market participants on the market.

The experts discovered that HFT participants had a varied effect on market volatility. Various high-frequency strategies have different effects on volatility movements in terms of scope and aspect. At the same time, HFT participants as a group of agents have no systemic targeted effect on the volatility of markets of the instruments under review.  The authors also note that HFT participants who tend to cancel their orders or change their conditions at a faster pace, quote a price of financial instruments that is closer to the spread than other HFT participants.

This paper continues the research into HFT. The previous issue looked into the influence of market participants using high-frequency trading algorithms on the liquidity of a number of instruments traded on the Moscow Exchange.

Overall, the report authors note a wide variety of trading activity indicators of different HFT participants that characterise their influence on market liquidity and volatility.