The Park Place Economist
High Frequency Trading and the Stock Market: A Look at the Effects of Trade Volume on Stock Price Changes
The effects of high frequency trading span far beyond what many are able to comprehend. There is, however, a great deal of evidence regarding the affects that trade volumes have on stock prices. As previously mentioned, computers now conduct over 70% of all trades made every day. Just four years ago the market was 30% computer based (CBS News, 2010). It is evident, then, that the numbers of shares traded each day (volume) have increased with the rise in the trades made each day (frequency). For example, the average volume of trades made weekly on the Dow Jones Industrial Average from 2000-2005 leapt over 180% from 2005-2010 (Yahoo! Finance, 2010). So, since high frequency trading can be linked to the large increase in trade volumes, it is appropriate to look at the relationship between volatility of the stock market and the volume of trades made.
By using time series analysis, it is hoped to find whether or not high frequency trading (looked at in terms of trade volume) is positively or negatively affecting the stock market. It is hypothesized that the higher the volume of trades made, the more volatile the stock prices will be. If this is the case, there may be policy implications regarding restrictions placed on the firms using high frequency trading.
Recommended CitationPortnoy, Kyle '11 (2011) "High Frequency Trading and the Stock Market: A Look at the Effects of Trade Volume on Stock Price Changes," The Park Place Economist: Vol. 19
Available at: https://digitalcommons.iwu.edu/parkplace/vol19/iss1/15