Financial Markets and Portfolio Management

, Volume 33, Issue 2, pp 183–208 | Cite as

High-frequency trading: a literature review

  • Gianluca Piero Maria VirgilioEmail author


The relatively recent phenomenon of high-frequency trading has had a profound impact on the micro-structure of financial markets. Several authors hailed it as a provider of liquidity and a mechanism for controlling volatility, two highly welcome features, especially beneficial to retail traders, whereas other authors view the situation generated by algorithmic trading as damaging for both small and institutional traders, and the orderly functioning of the markets. This paper analyzes the impact of high-frequency trading in respect of the main parameters affecting market quality: volatility, transaction costs, liquidity, price discovery, penalization of slower traders, and impact on sudden financial crises, the notorious flash crashes. As often happens within the financial community, different views stand to each other and no conclusive agreement on the value of most parameters has been reached as yet. A section on the apparently falling profits of high-frequency traders, as denounced in recent times, completes the review.


High-frequency trading Volatility Transaction costs Liquidity Bid-ask spread Financial crises 

JEL Classification




I wish to thank Prof. Markus Schmid, University of St. Gallen, Switzerland, editor of the Journal, and an anonymous referee, for their patience and their suggestions to help me improving the paper. All errors and omissions are obviously only mine.


  1. Abrol, S., Chesir, B., Mehta, N.: High frequency trading and US stock market microstructure: a study of interactions between complexities, risks and strategies residing in U.S. equity market microstructure. Financ. Mark. Inst. Instrum. 25(2), 107–165 (2016)Google Scholar
  2. AFM: The Netherlands Authority for the Financial Markets. A Case Analysis of Critiques on High-Frequency Trading, June (2016)Google Scholar
  3. Aitken, M., de Harris, F.H.B., McInish, T., Aspris, A., Foley, S.: High frequency trading—assessing the impact on market efficiency and integrity. Foresight Driver Review DR28. UK Government Office for Science (2012)Google Scholar
  4. Aït-Sahalia, Y., Saglam, M.: High-Frequency Traders: Taking Advantage of Speed. National Bureau of Economic Research. Working Paper 19531, Cambridge, MA (2013)Google Scholar
  5. Aldridge, I.: High-frequency runs and flash-crash predictability. J. Portf. Manag. 40(3), 113–123 (2014). Google Scholar
  6. Aldridge, I., Krawciw, S.: Aggressive high-frequency trading in equities. Huffington Post Business (2015). Accessed 05 Feb 2016
  7. Anagnostidis, P., Fontaine, P.: Liquidity provision, commonality and high frequency trading. EUROFIDAI Working Paper (2018)Google Scholar
  8. Arnoldi, J.: Computer algorithms, market manipulation and the institutionalization of high frequency trading. Theory Cult. Soc. 33(1), 29–52 (2016). Google Scholar
  9. Barker, W., Pomeranets, A.: The growth of high-frequency trading: implications for financial stability. Reports, Bank of Canada, Financial System Review, pp. 47–52 (2011).
  10. Baron, M., Brogaard, J., Kirilenko, A.: The Trading Profits of High Frequency Traders. Princeton University, Princeton (2012)Google Scholar
  11. Baron, M., Brogaard, J., Hagströmer, B., Kirilenko, A.: Risk and Return in High-Frequency Trading. Working Paper, November (2017)Google Scholar
  12. Benos, E., Sagade, S.: Price discovery and the cross-section of high-frequency trading. J. Financ. Mark. 30, 54–77 (2016). Google Scholar
  13. Biais, B., Foucault, T., Moinas, S.: Equilibrium fast trading. J. Financ. Econ. 116(2), 292–313 (2014). Google Scholar
  14. Blocher, J., Cooper, R., Seddon, J., Van Vliet, B.: Phantom liquidity and high-frequency quoting. J. Trading 11(3), 6–15 (2016). Google Scholar
  15. Bollen, N., Whaley, R.: Futures market volatility: what has changed? J. Futures Mark. 35(5), 426–454 (2015). Google Scholar
  16. Brogaard, J.: High Frequency Trading and Its Impact on Market Quality. Northwestern University, Evanston (2010)Google Scholar
  17. Brogaard, J.: High frequency trading, information, and profits. Foresight Driver Review DR10. UK Government Office for Science (2011)Google Scholar
  18. Brogaard, J., Hendershott, T., Hunt, S., Latza, T., Pedace, L., Ysusi, C.: High-frequency trading and the execution costs of institutional investors. Financ. Rev. 49(2), 345–369 (2014a). Google Scholar
  19. Brogaard, J., Hendershott, T., Riordan, R.: High frequency trading and price discovery. Rev. Financ. Stud. 27(8), 2267–2306 (2014b). Google Scholar
  20. Brogaard, L., Carrion, A., Moyaert, T., Riordan, R., Shkilko, A., Sokolov, K.: High Frequency Trading and Extreme Price Movements. Working Paper, February (2017)Google Scholar
  21. Bundesbank: Significance and impact of high-frequency trading in the German capital market. Deutsche Bundesbank Monthly. Report October 2016, pp. 37–60 (2016)Google Scholar
  22. Caivano, V.: The impact of high-frequency trading on volatility—evidence from the Italian market. Working Paper. CONSOB No. 80, March (2015)Google Scholar
  23. Chaboud, A., Chiquoine, B., Hjalmarsson, E., Vega, C.: Rise of the machines: algorithmic trading in the foreign exchange market. J. Finance 69(5), 2045–2084 (2014). Google Scholar
  24. Chaparro, F.: Here’s how high-frequency trading has changed the stock market. Credit Suisse, March (2017a)Google Scholar
  25. Chaparro, F.: The fastest traders on wall street are in trouble. Business Insider (2017b). August 2017. Accessed 13 June 2018
  26. Cliff, D.: Regulatory scrutiny of algorithmic trading systems: an assessment of the feasibility and potential economic impact. Foresight Driver Review EIA16. UK Government Office for Science (2011)Google Scholar
  27. Conrad, J., Wahal, S., Xiang, J.: High-frequency quoting, trading, and the efficiency of prices. J. Financ. Econ. 116, 271–291 (2015). Google Scholar
  28. Cvitanić, J., Kirilenko, A.: High Frequency Traders and Asset Prices. California Institute of Technology, Pasadena (2010)Google Scholar
  29. De Luca, M., Szostek, C., Cartlidge, J., Cliff, D.: Studies of interactions between human traders and algorithmic trading systems. Foresight Driver Review DR13. UK Government Office for Science (2011)Google Scholar
  30. Ding, S., Hanna, J., Hendershott, T.: How slow is the NBBO? A comparison with direct exchange feeds. Financ. Rev. 49, 313–332 (2014)Google Scholar
  31. Easley, D., Lopez de Prado, M., O’Hara, M.: The microstructure of the ‘flash crash’: flow toxicity, liquidity crashes, and the probability of informed trading. J. Portf. Manag. 37(2), 118–128 (2011). Google Scholar
  32. Farmer, J.D., Skouras, S.: Minimum resting times and transaction-to-order ratios: review of Amendment 2.3.f and Question 20. Foresight Driver Review EIA2. UK Government Office for Science (2012)Google Scholar
  33. Farmer, J.D., Skouras, S.: An ecological perspective on the future of computer trading. Quant. Finance 13(3), 325–346 (2013). Google Scholar
  34. Foresight: The Future of Computer Trading in Financial Markets, Final Project Report. UK Government Office for Science, London (2012)Google Scholar
  35. Foucault, T.: Pricing Liquidity in Electronic Markets. Foresight Driver Review DR18. UK Government Office for Science (2012)Google Scholar
  36. Foucault, T., Menkveld, A.J.: Competition for order ow and smart order routing systems. J. Finance 63, 119–158 (2008)Google Scholar
  37. Foucault, T., Kadan, O., Kandel, E.: Liquidity cycles and make/take fees in electronic markets. J. Finance 68(1), 299–341 (2013). Google Scholar
  38. Friederich, S., Payne, R.: Computer Based Trading, Liquidity and Trading Costs. Foresight Driver Review DR5. UK Government Office for Science (2011)Google Scholar
  39. Friederich, S., Payne, R.: Computer-Based Trading and Market Abuse. Foresight Driver Review DR20. UK Government Office for Science (2012)Google Scholar
  40. Golub, A., Keane, J., Poon, S.: High Frequency Trading and Mini Flash Crashes. University of Manchester, Manchester (2012). Available at SSRN: Accessed 28 April 2014
  41. Gomber, P., Arndt, B., Lutat, M., Uhle, T.: High-Frequency Trading. Goethe Universität, Frankfurt am Main (2011)Google Scholar
  42. Groth, S.: Does Algorithmic Trading Increase Volatility? Empirical Evidence from the Fully-Electronic Trading Platform Xetra Wirtschaftsinformatik Proceedings Paper 112. Goethe Universität, Frankfurt am Main (2011)Google Scholar
  43. Gsell, M.: Assessing the Impact of Algorithmic Trading on Markets: A Simulation Approach. Goethe Universität, Frankfurt am Main (2008)Google Scholar
  44. Gurkaynak, R.: Econometric Tests of Asset Price Bubbles: Taking Stock. Board of Governors of the Federal Reserve System. Washington, January (2005)Google Scholar
  45. Hagströmer, B., Nordén, L.: The diversity of high frequency traders. J. Financ. Mark. 16(4), 741–770 (2013)Google Scholar
  46. Haldane, A.: The Race to Zero. Speech held at the International Economic Association Sixteenth World Congress. Bank of England, Beijing (2011)Google Scholar
  47. Harris, L.: What to do about high-frequency trading. Financ. Anal. J. 69(2), 6–9 (2013). Google Scholar
  48. Hasbrouck, J., Saar, G.: Technology and liquidity provision: the blurring of traditional definitions. J. Financ. Mark. 12(2), 143–172 (2009). Google Scholar
  49. Hasbrouck, J., Saar, G.: Low-latency trading. J. Financ. Mark. 16(4), 646–679 (2013)Google Scholar
  50. Hendershott, T.: High Frequency Trading and Price Efficiency. Foresight Driver Review DR12. UK Government Office for Science (2011)Google Scholar
  51. Hendershott, T., Mouton, P.C.: Automation, speed, and stock market quality: the NYSE’s hybrid. J. Financ. Mark. 14(4), 568–604 (2011). Google Scholar
  52. Hirschey, N.: Do High-Frequency Traders Anticipate Buying and Selling Pressure? Working Paper. London Business School, February (2018)Google Scholar
  53. Hoffmann, P.: A dynamic limit order market with fast and slow traders. J. Financ. Econ. 113(1), 156–169 (2014). Google Scholar
  54. Jain, P., Jain, P., McInish, T.: Does high-frequency trading increase systemic risk? Working Paper (2016)Google Scholar
  55. Jarrow, R., Protter, P.: A dysfunctional role of high frequency trading in electronic markets. Int. J. Theor. Appl. Finance 15, 3 (2012). Google Scholar
  56. Johnson, N., Zhao, G.: Brave New World: Quantifying the New Instabilities and Risks Arising in Subsecond Algorithmic Trading. Foresight Driver Review DR27. UK Government Office for Science (2012)Google Scholar
  57. Johnson, N., Zhao, G., Hunsader, E., Meng, J., Ravinder, A., Carran, S., Tivnan, B.: Abrupt rise of new machine ecology beyond human response time. Sci. Rep. 3, 2627 (2013). Google Scholar
  58. Jovanovic, B., Menkveld, A.: Middlemen in Limit-Order Markets (2016). Available at SSRN: Accessed 18 Dec 2014
  59. Kelejian, H.H., Mukerji, P.: Does high frequency algorithmic trading matter for non-AT investors? Res. Int. Bus. Finance 37, 78–92 (2016). Google Scholar
  60. Kaya, O.: High frequency trading: reaching the limits. Autom. Trader Mag. 41, 23–27 (2016)Google Scholar
  61. Kirchner, S.: High frequency trading: facts and fiction. Policy 31(4), 8–20 (2016)Google Scholar
  62. Kirilenko, A., Lo, A.: Moore’s law versus Murphy’s Law: algorithmic trading and its discontents. J. Econ. Perspect. 27(2), 51–72 (2013). Google Scholar
  63. Kirilenko, A., Kyle, A., Samadi, M., Tuzun, T.: The flash crash: the impact of high frequency trading on an electronic market. J. Finance 72(3), 967–998 (2017)Google Scholar
  64. Kovac, P.: Flash Boys: Not So Fast. Directissima Press, Cambridge (2014)Google Scholar
  65. Leal, S., Napoletano, M., Roventini, A., Fagiolo, G.: Rock Around the Clock: An Agent-Based Model of Low- and High-Frequency Trading. Working Paper, February (2014)Google Scholar
  66. Leland, H.: Leverage, Forced Asset Sales and Market Stability: Lessons from Past Market Crises and the Flash Crash’. Foresight Driver Review DR9. UK Government Office for Science (2011)Google Scholar
  67. Lewis, M.: Flash Boys. W. W. Norton & Company Inc., New York (2014)Google Scholar
  68. Linton, O., Mahmoodzadeh, S.: Implications of High-Frequency Trading for Security Markets. Working Paper, January (2018)Google Scholar
  69. Linton, O., O’Hara, M.: The Impact of Computer Trading on Liquidity, Price Efficiency/Discovery and Transaction Costs. Foresight Driver Review WP2. UK Government Office for Science (2012)Google Scholar
  70. MacKenzie, D.: High-Frequency Trading and the Shaping of Markets. Working Paper. School of Social and Political Science. University of Edinburgh, June (2014)Google Scholar
  71. Manahov, V., Hudson, R.: The implications of high frequency trading on market efficiency and price discovery. Appl. Econ. Lett. 21(16), 1148–1151 (2014). Google Scholar
  72. Massa, A., Chilton, C.: They’re The World’s Fastest Traders. Why Aren’t They Thriving? Bloomberg (2017). Accessed 04 June 2018
  73. Menkveld, A.: High frequency trading and the new-market makers. J. Financ. Mark. 16(4), 712–740 (2013)Google Scholar
  74. Menkveld, A.J.: The economics of high-frequency trading: taking stock. Annu. Rev. Financ. Econ. 8, 1–24 (2016)Google Scholar
  75. Menkveld, A., Zoican, M.: Need for Speed? Exchange Latency and Liquidity Tinbergen Institute Discussion Paper 14-097/IV/DSF78 (2013). Available at SSRN: Accessed 7 May 2016
  76. Meyer, G., Bullock, N., Rennison, J.: How High-Frequency Trading Hit a Speed Bump. The Big Read, New York (2018)Google Scholar
  77. Miller, R., Shorter, G.: High Frequency Trading: Overview of Recent Developments. Congressional Research Service. 7-5700, April (2016)Google Scholar
  78. Myers, B., Gerig, A.: Simulating the synchronizing behavior of high-frequency trading in multiple markets. In: Bera, A., Ivliev, S., Lillo, F. (eds.) Financial Econometrics and Empirical Market Microstructure, pp. 207–213. Springer, Berlin (2014)Google Scholar
  79. Nanex: Nanex~15-Jul-2014~Perfect Pilfering. Nanex blog (2014). Accessed 13 June 2018
  80. Sornette, D., von der Becke, S.: Crashes and High Frequency Trading. Swiss Finance Institute. Research Paper Series No. 11-63, Zürich (2011)Google Scholar
  81. Stiglitz, J.: Tapping the brakes: are less active markets safer and better for the economy? In: 2014 Financial Markets Conference, 15 Apr 2014. Federal Reserve Bank of Atlanta, Atlanta (2014)Google Scholar
  82. Taleb, N.: The Black Swan. Random House Inc., New York (2007)Google Scholar
  83. van Kervel, V.: Competition for order flow with fast and slow traders. Rev. Financ. Stud. 28(7), 2094–2127 (2015). Google Scholar
  84. Verousis, T., Perotti, P., Sermpinis, G.: One size fits all? High frequency trading, tick size changes and the implications for exchanges: market quality and market structure considerations. Rev. Quant. Financ. Account. 50, 353–392 (2018). Google Scholar
  85. Virgilio, G.: The impact of high-frequency trading on market volatility. J. Trading 11(2), 55–63 (2016). Google Scholar
  86. Vuorenmaa, T., Wang, L.: An Agent-Based Model of the Flash Crash of May 6, 2010, with Policy Implications (2014). Available at SSRN: Accessed 21 April 2014Google Scholar
  87. Weaver, D.: Minimum Obligations of Market Makers. Foresight Driver Review EIA8. UK Government Office for Science (2012)Google Scholar
  88. Worstall, T.: Don’t Worry, Be Happy—High Frequency Trading is Over, Dead, It’s Done. Forbes (2017). 25 Mar 2017. Accessed 08 June 2018
  89. Zervoudakis, F., Lawrence, D., Gontikas, G., Al, M.M.: Perspectives on High-Frequency Trading. University College London, London (2012)Google Scholar
  90. Zhang, F.: High-Frequency Trading, Stock Volatility, and Price Discovery (2010). Available at SSRN: Accessed 31 July 2014
  91. Zhang, S.: Need for speed: Hard information processing in a high-frequency world. J. Futures Mark. 38, 3–21 (2017). Google Scholar
  92. Zingrand, J.P., Cliff, D., Hendershott, T.: Financial Stability and Computer Based Trading. Foresight Driver Review WP2. UK Government Office for Science (2012)Google Scholar

Copyright information

© Swiss Society for Financial Market Research 2019

Authors and Affiliations

  1. 1.Universidad Católica Sedes SapientiaeNueva CajamarcaPeru

Personalised recommendations