Mean Machines? - High-Frequency Trading and Market Quality in the Swedish Financial Market

Abstract: The role and effects of high-frequency trading have been heavily discussed over the past few years. However, the actual effects of this type of trading in Sweden have not been properly investigated. By using a previously unmatched dataset, with minute observations, we analyze the effects of high-frequency trading on the quality of the Swedish financial market. To do this we define three parameters of market quality: volatility, liquidity and market efficiency. The research design is based on a difference-in-difference approach on the structural change of NASDAQ OMX Stockholm, the implementation of the INET trading platform, and variance ratio tests. We find that high-frequency trading overall has positive effects on market quality in Sweden; while volatility is somewhat reduced and liquidity is improved on the margin the market efficiency remains unaffected. We suggest that the risks with high-frequency trading are acceptable and that the general fear and aversion towards this type of trading needs to be reconsidered.