Liquidity Providers in “Extreme” Periods: High Frequency Machines vs. Human Electronic and Floor Traders
62 Pages Posted: 3 Jun 2014 Last revised: 11 Jan 2024
Date Written: October 12, 2023
Abstract
We use U.S. crude-oil futures data with coded trader identities to investigate the concurrent trading behaviors of high-frequency machine-traders (“HFTs”), humans trading electronically, and physical floor-traders in “extreme” periods characterized by large and persistently abnormal information or customer order-flow shocks. Compared to co-existing human electronic and floor traders, HFTs reduce trade participation, cut liquidity provision, and increase effective spreads during information-driven extreme periods, but do not behave differently during extreme periods driven by uninformative customer order-flow. These differences are driven by automation, not anonymity or physical floor-trading. Real-time human electronic and floor-traders usefully complement pre-programmed machine traders amid extreme conditions.
Keywords: HFT, Human traders, Anonymity, Liquidity, Information shocks, Order-flow shocks
JEL Classification: G10, G14, G18, Q40
Suggested Citation: Suggested Citation