Tracking High-Frequency Trading Activity in China and Its Effects on Market Quality
Li Guo, Frank Weikai Li, Ding Qi, Lijian Sun
Abstract
We develop a new order-level proxy for high-frequency trading (HFT) activity based on precise order placement and study its effects on market quality. With quotes updating multiple times per second, millisecond-level order-book access makes high-frequency traders more likely to submit active exact-match orders, defined as limit orders priced exactly at the prevailing best opposite-side quote. Using Shenzhen Stock Exchange data, we validate the proxy: active exact-match orders respond faster to quote updates, cancel more rapidly, concentrate when depth imbalance is favorable and spreads are narrow, and predict mid-quote returns from 100 milliseconds through ten minutes. A difference-in-differences design exploiting cross-channel variation in order dissemination latency at the market open shows that lower latency increases active exact-match shares. This variation yields plausibly causal evidence that latency-induced HFT raises short-horizon price variation, wide-spread incidence, and adverse-selection exposure, while realized spreads decline and pricing error falls modestly. Unlike developed markets, China's T+1 constraint, absence of maker-taker rebates, and limits on rapid quote revision tilt speed advantages toward directional liquidity taking, highlighting how market design shapes the channel through which speed affects market quality.
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