How high frequency trading affects a market index
Dror Y Kenett1, Eshel Ben-Jacob, H Eugene Stanley
1School of Physics and Astronomy, The Raymond and Beverly Sackler Faculty of Exact Sciences, Tel-Aviv University, Tel-Aviv 69978, Israel. drorkenett@gmail.com
Scientific Reports
|July 3, 2013
Summary
In short time scales, individual stocks influence market indexes more than previously thought. This suggests updating index price publication for high-frequency trading accuracy.
Area of Science:
- Quantitative Finance
- Market Microstructure
- Financial Econometrics
Background:
- Market indexes are weighted averages of constituent stocks.
- Typically, indexes influence stocks more than vice versa over longer time scales (daily or longer).
- The dynamic of this relationship at very short time scales remains less understood.
Purpose of the Study:
- To investigate the influence direction between market indexes and constituent stocks at high-frequency time scales.
- To analyze how the interaction changes from longer to shorter trading intervals.
Main Methods:
- Utilized high-frequency financial data.
- Employed a correlation-based analysis approach to quantify interdependencies.
- Examined the causal relationship between index movements and stock price changes.
Main Results:
- In short time scales, constituent stocks exert a stronger influence on the market index.
- The traditional view of index dominance is reversed at high frequencies.
- Evidence of a bidirectional but asymmetric influence, with stocks leading the index at micro-balances.
Conclusions:
- The interaction between market indexes and stocks is scale-dependent.
- Findings challenge conventional market dynamics understanding for high-frequency trading.
- Recommends publishing index prices at shorter time scales to match transaction frequencies.
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