Is high-frequency trading inducing changes in market microstructure and dynamics?

TL;DR

This study examines how the rise of high-frequency trading since 2005 has altered market microstructure, revealing increased self-similarity and changes in trading volume dynamics across major stocks.

Contribution

It provides empirical evidence linking high-frequency trading to shifts in market microstructure and trading volume behavior after 2005.

Findings

Increase in Hurst exponent indicating more self-similar volume dynamics

Temporal correlation with Reg NMS reforms enabling high-frequency trading

Decline in average trade size with higher self-similarity in smaller trades

Abstract

Using high-frequency time series of stock prices and share volumes sizes from January 2002-May 2009, this paper investigates whether the effects of the onset of high-frequency trading, most prominent since 2005, are apparent in the dynamics of the dollar traded volume. Indeed it is found in almost all of 14 heavily traded stocks, that there has been an increase in the Hurst exponent of dollar traded volume from Gaussian noise in the earlier years to more self-similar dynamics in later years. This shift is linked both temporally to the Reg NMS reforms allowing high-frequency trading to flourish as well as to the declining average size of trades with smaller trades showing markedly higher degrees of self-similarity.