Impact of High Frequency Trading on Stock Market’s Volatility under COVID-19: Evidence from Selected Asian Economies

Author: Fizza Shamraiz

Abstract

Over the last few years, there has been a dramatic shift in how securities are traded in the capital markets globally. By employing, highly complex algorithms and superfast computer technology, Institutions now execute trades within a matter of microseconds or Nanoseconds through a practice known as high-frequency trading. HFT, now a day’s widely used trading mechanism that accounts for 80% of the trading volume of the developed markets as well as getting popularity among developing or volatile markets. This study aims to analyze whether the HFT technique will going to help in diluting the concentration of the stock market’s volatility or it exacerbate the recent market turmoil situation of COVID-19. We employed the unique dataset of six stock markets those are involved in High-Frequency Trading as well as non-high frequency trading and are affected by a pandemic with different level (in context of financial disaster) from July 2019 July 2020 in order to capture the difference in volatility level of the selected economies in both dimensions i.e. HFT vs non-HFT as well as Pre-COVID vs. Post- COVID. This study concludes that high-frequency traded stocks are positively correlated with market volatility in both the Pre-COVID and Post-COVID periods, but the relation is comparatively weaker in Post-COVID as compared to the Pre-COVID period. Secondly, in comparison with Non-high frequency traded stocks its stock price volatility rate is low. This implies the high-frequency trading is beneficial in the context of presuming stock volatility in the markets.