How Does High-Frequency Trading Affect Low-Frequency Trading?

High-frequency trading dominates trading in financial markets. How it affects the low-frequency trading, however, is still unclear. Using NASDAQ order book data, the authors investigate this question by categorizing orders as either high or low frequency, and examining several measures. They find that high-frequency trading enhances liquidity by increasing the trade frequency and quantity of low-frequency orders. High-frequency trading also reduces the waiting time of low-frequency limit orders and improves their likelihood of execution. The results indicate that high-frequency trading has a liquidity provision effect and improves the execution quality of low-frequency orders.