The Impact of High Frequency Traders On the ELW Market

Woo, Min Cheol; Choe, Hyuk

Korean Journal of Financial Studies 2013;42(4):699-732.
Published online September 30, 2013.

Min Cheol Woo, Hyuk Choe

고빈도거래자의 매매양태 분석

우민철, 최혁

Abstract

This study analyzes the impact of HFTs` orders and trades on Korea`s ELW market. HFTs` trading profit/loss are analyzed using trading books and order books for ELW issues listed from the opening of the market and July 31, 2011. Analysis is made to whether HFT`s ordering and trading patterns have a systematic impact on market liquidity and efficiency. The findings of this study are as follows. First, unlike the general perception that HFT have difficulty in realizing a profit due to transaction costs arising from frequent transactions, they actually earn a profit thanks to the favorable institutional environment due to the exemption of transaction tax. HFTs` profit comes not from transactions with individual investors, but from transactions with LPs. Second, HFTs` market participation increases market liquidity even when factors that affect liquidity are controlled for. In addition, the gap between the market value and the theoretical value decreases, improving market efficiency. These findings can give those with a financial supervisory or regulatory role an insight into how to ensure financial market stability and protect investors from the wave of fast trades sweeping the global financial market.

Key Words: 고빈도거래자,시장 폭락,이익 비율,회귀분석,ELW,Flash Crash,HFT,Profit Ratio,Regression