The Impact of High-Frequency Trading on Market Volatility

This article presents the results of an agent-based model simulation under two different cases: a quiet situation and a market following a trend. Although the quiet situation does not identify any abnormal behavior, participation of high-frequency (HF) traders leads to a statistically significant increase in volatility when the market is under stress. This result can be explained by the delay suffered by market orders posted by low-frequency traders during a trend. These trades are often executed at a price that, because of its rapid movements, is worse than was intended when it was posted a few milliseconds earlier, thus increasing volatility. As the number of HF traders increases, volatility starts to diminish again. This can be explained by the more homogeneous situation that occurs when most trading is executed by players experiencing similar latencies.