High-frequency trading and market quality: The case of a “slightly exposed” market

Abstract

Impacts of high-frequency trading (HFT) on market quality and various actors have been broadly studied. However, what happens when HFT is not a prominent figure in a market remains relatively unexplored. The paper seeks to answer this question focusing on 30 blue chip stocks in an emerging market, Borsa Istanbul, through Dec 2015 to Mar 2017. Despite a low share in the overall activity, HFT has observable effects: liquidity provision by non-HFT traders significantly reduces with HFT; HFT activity on the sell side induces higher volatility; and HFT generates profits on both positive and negative return days. These findings raise concerns regarding HFT and show potential externalities are not specific to the markets with HFT dominance.