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Högfrekvenshandelns effekt på volatiliteten, likviditeten och prissättningen av värdepapper på den svenska marknaden.

Hjort, Carolina LU (2012) NEKH01 20121
Department of Economics
Abstract
In 2007, a new regulatory framework in the European economic area opened up to a less regulated market. Now, share trading was not only done on the main stock markets but could also take place at alternative trading facilities. The deregulation led to greater competition, better consumer protection and a fragmented market with alternative trading facilities, which are subject to less regulation. The fragmentation of the market completely opened up to new approaches in trading and paved the way for a new phenomenon, high-frequency trading.
The purpose of this paper is to investigate the effect of high frequency trading on the volatility, liquidity and the prices of the securities on the Swedish market.
To get a greater insight into the... (More)
In 2007, a new regulatory framework in the European economic area opened up to a less regulated market. Now, share trading was not only done on the main stock markets but could also take place at alternative trading facilities. The deregulation led to greater competition, better consumer protection and a fragmented market with alternative trading facilities, which are subject to less regulation. The fragmentation of the market completely opened up to new approaches in trading and paved the way for a new phenomenon, high-frequency trading.
The purpose of this paper is to investigate the effect of high frequency trading on the volatility, liquidity and the prices of the securities on the Swedish market.
To get a greater insight into the subject, a literature study of high frequency trading has been done. Established literature is the basis for the empirical investigation performed. Financial reports, government publications, legal texts and articles have also been studied.
Furthermore, I have conducted interviews with participants in the market that specialize in different aspects of the high frequency trading. This involves areas as risk management, algorithm development and trading.
The survey data made by Swedish authority Finansinspektionen on the topic of high frequency trading in the Swedish market shows that the financial market will not fulfill its essential function without regulation. In the long term, and under normal market conditions, the high frequency trading imposes a positive effect in the form of grants to higher market efficiency by ensuring a proper pricing. The trading smooths the impacts of he the movements in the market and contributes to less volatility and a good pricing.
In the short term, high frequency trading has a negative impact on the market. The consequence of this is reduced liquidity and increased volatility since the high-frequency traders doesn’t have any commitments in the form of acting as a market maker. During turbulent and stressful condition they just leave the market. The aggressive strategies of high frequency trading, with its short-term price changes also contribute to a mispricing created by faulty or incomplete information.
To keep the development of the algorithms under the supervision and planning for future risk scenarios, I recommend the following improvements to be implemented in the future regulations;
Increase the stability in the financial system through a damper in the form of higher fines and the introduction of high tick size. The introduction of a higher latency, and a limit on how fast you are allowed to act, would also contribute to a more stable system.
There should also be an audit review of the algorithms and its use to ensure the quality and examine if they follow the law. I also suggest the introduction of circuit breakers between and within the trading platforms to isolate extreme market events. Colocation and the usage of premium Direct Market Access and Direct Market Access should be abolished. Both processes involve a conflict of interest for the stock market. I also believe that high frequency exhibit unhealthy patterns of trade in its fundamental policies and in its placement. A traditional trader, who is using the same strategies in secret, had been convicted of market abuse and fraud. (Less)
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author
Hjort, Carolina LU
supervisor
organization
course
NEKH01 20121
year
type
M2 - Bachelor Degree
subject
keywords
High frequency trading, volatility, liquidity, pricing
language
Swedish
id
2688859
date added to LUP
2012-06-15 12:31:25
date last changed
2012-06-15 12:31:25
@misc{2688859,
  abstract     = {In 2007, a new regulatory framework in the European economic area opened up to a less regulated market. Now, share trading was not only done on the main stock markets but could also take place at alternative trading facilities. The deregulation led to greater competition, better consumer protection and a fragmented market with alternative trading facilities, which are subject to less regulation. The fragmentation of the market completely opened up to new approaches in trading and paved the way for a new phenomenon, high-frequency trading.
The purpose of this paper is to investigate the effect of high frequency trading on the volatility, liquidity and the prices of the securities on the Swedish market.
To get a greater insight into the subject, a literature study of high frequency trading has been done. Established literature is the basis for the empirical investigation performed. Financial reports, government publications, legal texts and articles have also been studied. 
Furthermore, I have conducted interviews with participants in the market that specialize in different aspects of the high frequency trading. This involves areas as risk management, algorithm development and trading.
The survey data made by Swedish authority Finansinspektionen on the topic of high frequency trading in the Swedish market shows that the financial market will not fulfill its essential function without regulation. In the long term, and under normal market conditions, the high frequency trading imposes a positive effect in the form of grants to higher market efficiency by ensuring a proper pricing. The trading smooths the impacts of he the movements in the market and contributes to less volatility and a good pricing.
In the short term, high frequency trading has a negative impact on the market. The consequence of this is reduced liquidity and increased volatility since the high-frequency traders doesn’t have any commitments in the form of acting as a market maker. During turbulent and stressful condition they just leave the market. The aggressive strategies of high frequency trading, with its short-term price changes also contribute to a mispricing created by faulty or incomplete information.
To keep the development of the algorithms under the supervision and planning for future risk scenarios, I recommend the following improvements to be implemented in the future regulations;
Increase the stability in the financial system through a damper in the form of higher fines and the introduction of high tick size. The introduction of a higher latency, and a limit on how fast you are allowed to act, would also contribute to a more stable system.
There should also be an audit review of the algorithms and its use to ensure the quality and examine if they follow the law. I also suggest the introduction of circuit breakers between and within the trading platforms to isolate extreme market events. Colocation and the usage of premium Direct Market Access and Direct Market Access should be abolished. Both processes involve a conflict of interest for the stock market. I also believe that high frequency exhibit unhealthy patterns of trade in its fundamental policies and in its placement. A traditional trader, who is using the same strategies in secret, had been convicted of market abuse and fraud.},
  author       = {Hjort, Carolina},
  keyword      = {High frequency trading,volatility,liquidity,pricing},
  language     = {swe},
  note         = {Student Paper},
  title        = {Högfrekvenshandelns effekt på volatiliteten, likviditeten och prissättningen av värdepapper på den svenska marknaden.},
  year         = {2012},
}