High Frequency Trading, Market Fragmentation and Market Quality: An EU Market Evidence

This Ph.D. thesis joins the debate regarding the social benefit of HFT with the aim of contributing to HFT research originally. My research design integrates both HFT and market fragmentation and extends analyses within and across markets. I use the European equity markets as a laboratory as Europe has been confronting the issue of HFT influx and market fragmentation since the adoption of the Market in Financial Instruments and Directives (MiFID) in November 2007 by the European Parliament. I employ an extremely large dataset with the highest granularity, which gives the most recent and longest coverage of data in HFT research to date. I mainly examine the effects of HFT and market fragmentation on market liquidity within and across European markets. In chapter 1, I review the literature and develop my arguments that rationalise the studies presented in this thesis. In chapter 2, I examine the impact of HFT and market fragmentation on market liquidity within a market by applying three alternative estimations: OLS, IV-GMM and simultaneous equations model. I document that HFT improves liquidity, but market fragmentation appears detrimental to liquidly. I show that the interaction between HFT and market fragmentation has significant impact on market environment. It seems that in the absence of HFT, a fragmented market would be more detrimental to liquidity. In chapter 3, I extend the analysis of the previous chapter to incorporate all fragmented markets, and present a novel approach to creating full view HFT image from HFT activities across markets. I primarily examine how HFT and fragmentation affect market liquidity across markets by using the simultaneous equations model. The results show that HFT improves liquidity across markets, whereas market fragmentation harms liquidity in the primary exchange but improves in alternative exchanges. I also provide evidence that HFT activities are linked across markets, and HFTs provide liquidity when spreads are wider. It seems that HFTs concentrate in the primary exchange during periods of high market volatility