The impact of latency sensitive trading on high frequency arbitrage opportunities

Alex Frino*, Vito Mollica, Robert I. Webb, Shunquan Zhang

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

4 Citations (Scopus)

Abstract

This study examines the . duration, . frequency and . profitability of potential high frequency arbitrage strategies between the share price index futures contract and an exchange-traded fund (ETF) written on the S&P/ASX200 constituent securities traded on the Australian Securities Exchange (ASX). We find the frequency and profitability of potential arbitrage opportunities are greater during volatile and high turnover periods-other things equal. We examine the impact of increased competition in high frequency trading (HFT) by identifying the number of 'co-location connections' utilized in the ASX's minimum latency liquidity center. We document an increase in the frequency, duration and value (albeit small) of index arbitrage profit opportunities with increased HFT connections. Our results are robust to the inclusion of transaction costs. We conclude that increased HFT activity in markets increases trade execution risk associated with arbitrage (or legging risk) which in turn increases mispricing in markets.

Original languageEnglish
Pages (from-to)91-102
Number of pages12
JournalPacific-Basin Finance Journal
Volume45
Early online date20 Aug 2016
DOIs
Publication statusPublished - Oct 2017

Keywords

  • Co-location
  • ETF
  • Futures
  • High frequency trading
  • Statistical arbitrage

Fingerprint

Dive into the research topics of 'The impact of latency sensitive trading on high frequency arbitrage opportunities'. Together they form a unique fingerprint.

Cite this