eThesis - Kauppakorkeakoulun sähköiset gradut

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PURPOSE OF THE STUDY The purpose of this study is to examine the role of high frequency trading in limit order book activity in Helsinki Stock Exchange. This study investigates the degree of high frequency trading in the market place by identifying high frequency trading accounts from limit order data and by looking at their trading behavior with respect to order generation and cancellation dynamics.

DATA The data used in this study is one week order level data from NASDAQ OMX Nordic Exchange Helsinki for five selected liquid stocks. The order data, which consists of limit orders, cancellations, and executions, is used to build a limit order book that captures the trading mechanism of an electronic order-driven market. The order level data is also used to identify high frequency trading accounts by looking at their order generation characteristics.

RESULTS This study finds that the limit order books of the sampled stocks are dominated by a handful of high frequency traders employing sophisticated trading algorithms and accessing the market with low-latency connections. The evidence suggests that these traders are responsible for a majority of the order flow and that their order generation is highly periodic. Their order flow dynamics indicate that they often cancel a limit order shortly after placing it, and that their limit order cancellations are followed rapidly by new limit order messages. This study also finds that order flow from high frequency trading accounts has short-term effects on stock price for most of the sampled securities.