Market Integration and High Frequency Intermediation

Terrence Hendershott
University of California, Berkeley (UC Berkeley)

We examine two important trends in stock market trading. First, adverse selection has changed as the fraction of price discovery occurring through market orders has declined significantly. Second, trading has fragmented across many markets. We study high frequency trading firms (HFTs) role in these trends by examining trading and price discovery within and across stock exchanges in Canada. HFTs’ trades, quotes, and limit orders incorporate more information than non-HTFs’ both within and across exchanges. HFTs’quotes are the primary channel through which price discovery occurs and HFTs initiate more than 70% of price changes that move across exchanges. We provide evidence that HFTs use information on price changes across assets and within asset information in the limit order book within and across markets. These results suggest that HFTs integrate price discovery across markets.

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