| Description |
This dissertation is composed of three essays in empirical market microstructure. My first two essays study market quality issues related to High-frequency Trading (HFT) using a dataset provided by NASDAQ that identifies the activity of high-frequency traders (HFTs). My first essay studies the systematic effects of HFT on market quality. I find only small effects of HFT participation on spreads and adverse selection costs, and I find evidence that HFT trades improve price efficiency. I also examine HFT trading strategies, and show that HFTs engage in successful intraday market timing. My second essay studies HFT in extreme market conditions, focusing on whether it has a stabilizing or destabilizing effect. I find that HFTs buy during mini-flash crashes, sell during price spikes, and provide more liquidity than they consume during both types of events. These results suggest HFTs play a stabilizing role during extreme return events, but their net trading volumes are low so these effects are probably small. I also examine returns around large HFT order imbalances, and find only economically small evidence of the price momentum that these imbalances have been hypothesized to cause. Finally, I study HFT activity around sustained market order flow imbalances, termed "toxic order flow" by Easley, Lopez de Prado, and O'Hara (2011), and find that HFT participation levels decrease as order flow toxicity increases. Overall, in my first two essays, I find evidence of beneficial and neutral roles played by HFTs, both in normal and extreme market conditions, but no significant evidence for any of the detrimental impacts they are thought to have. My third essay compares corporate bond trading costs in a market that provides pretrade transparency (the NYSE) with those in a market that is opaque (the OTC market). I find that trading costs are dramatically lower in the market with pretrade transparency, and that pretrade transparency is the most likely explanation for the difference. I also advance a likely explanation for the puzzle of why bond trading costs are lower for larger trades, and introduce a new statistical procedure for assessing trade signing errors in microstructure data with stale quotes. |
