The implications of high-frequency trading on market efficiency and price discovery

Abstract

This study investigates the implications of high-frequency trading (HFT) on market efficiency and price discovery by using state-space models and real-life one-minute high-frequency data of the six most traded currency pairs worldwide – USD/EUR, USD/JPY, USD/GBP, USD/AUD, USD/CHF and USD/CAD. We found significant evidence that HFT enhances market efficiency and has a beneficial role in price discovery by trading in the direction of the permanent component of the state-space model and in the opposite direction of its transitory component.

Keywords:

• high-frequency trading
• price efficiency

JEL Classification:

• G10
• G12