Limit Order Placement by High-Frequency Traders

This study, conducted by the University of California and the University of Sydney used a unique dataset consisting of limit order placement, execution, and cancellations on Nasdaq to examine liquidity provision by high-frequency trading (HFT) firms, which is a central issue in the ongoing debates about HFT.

The study shows that HFT firms more effectively use order cancellation to strategically manage their limit orders in anticipation of short-term price movements than non-HFT firms. HFT firms increase their liquidity provision during periods of high volatility; their liquidity provision is less affected by order imbalance shocks than that of non-HFT firms.

Overall, the results indicate that HFT limit orders exert a stabilizing influence on markets.

Read the full study here.