Details

Autor(en) / Beteiligte

• Musciotto, Federico
• Piilo, Jyrki
• Mantegna, Rosario N.

Titel

High-frequency trading and networked markets

Ist Teil von

• Proceedings of the National Academy of Sciences - PNAS, 2021-06, Vol.118 (26)

Ort / Verlag

Washington: National Academy of Sciences

Erscheinungsjahr

2021

Link zum Volltext

Quelle

EZB Free E-Journals

Beschreibungen/Notizen

• Significance During the last two decades, technological innovation and regulatory requirements have deeply changed the way financial markets work. Today, financial markets are characterized by the presence of high-frequency traders (able to perform financial transactions at a submillisecond time scale) and market fragmentation. Using methods of complex networks, we show that some market participants (specifically so-called market members) preferentially interact with or avoid other market members persistently over a time scale extending up to several months. By investigating two financial venues at three different periods of time from two different decades, we show that the persistent networked nature of today’s markets is most pronounced since the diffusion of high-frequency trading and market fragmentation. Financial markets have undergone a deep reorganization during the last 20 y. A mixture of technological innovation and regulatory constraints has promoted the diffusion of market fragmentation and high-frequency trading. The new stock market has changed the traditional ecology of market participants and market professionals, and financial markets have evolved into complex sociotechnical institutions characterized by a great heterogeneity in the time scales of market members’ interactions that cover more than eight orders of magnitude. We analyze three different datasets for two highly studied market venues recorded in 2004 to 2006, 2010 to 2011, and 2018. Using methods of complex network theory, we show that transactions between specific couples of market members are systematically and persistently overexpressed or underexpressed. Contemporary stock markets are therefore networked markets where liquidity provision of market members has statistically detectable preferences or avoidances with respect to some market members over time with a degree of persistence that can cover several months. We show a sizable increase in both the number and persistence of networked relationships between market members in most recent years and how technological and regulatory innovations affect the networked nature of the markets. Our study also shows that the portfolio of strategic trading decisions of high-frequency traders has evolved over the years, adding to the liquidity provision other market activities that consume market liquidity.