Today high frequency trading (HFT) plays a central role in financial markets. The rise of HFT has tremendously increased the frequency of messaging in stock markets and has changed the way liquidity is supplied to stock markets. At the same time, markets are fragmented and stocks trade on several venues. Some HFT strategies consist of supplying liquidity on several trading venues simultaneously and then withdrawing that liquidity as soon as some orders from the strategy are executed on one of the venues. This makes the true level of market liquidity different from its perceived level – the difference being ghost liquidity (GL).
Understanding GL is important as it causes investors and regulators to mis-estimate the likely effects of trades and thus may lead to sub-optimal investment decisions. Our project aims to establish empirical measures of GL, to quantify its magnitude in European stock markets, to identify its determinants and understand its links with HFT, and to assess its impact on market quality and fairness.
The originality of our project is based on a unique database provided by the European Securities Markets Authority (ESMA) and covering most active European trading venues for a large sample of stocks in May 2013. The ESMA dataset contains confidential detailed information about traders which will allow us to track them across venues.
Understanding GL is important as it causes investors and regulators to mis-estimate the likely effects of trades and thus may lead to sub-optimal investment decisions. Our project aims to establish empirical measures of GL, to quantify its magnitude in European stock markets, to identify its determinants and understand its links with HFT, and to assess its impact on market quality and fairness.
The originality of our project is based on a unique database provided by the European Securities Markets Authority (ESMA) and covering most active European trading venues for a large sample of stocks in May 2013. The ESMA dataset contains confidential detailed information about traders which will allow us to track them across venues.