Working Paper: NBER ID: w21122
Authors: Takatoshi Ito; Masahiro Yamada
Abstract: We empirically examine the order flows spillovers between Nasdaq and the Forex markets in 2008 and 2009. With emphasis on a role of high-frequency traders (HFTs) who aggregate information between the two markets as well as within each market, our results show that HFTs in Nasdaq trade intensively on the market-wide information more rapidly than other market participants, and that their order flows contain more information about the Forex rates than those of the Forex themselves. As a result, order flows by HFTs in Nasdaq significantly lead those in the Forex activities. Reflecting each market's exposures to the common shocks during the Global Financial crisis, these spillovers vary over time, and HFTs have increased their influences. These empirical results are consistent with theoretical predictions of the rational expectations model of multi-asset trading.
Keywords: High-Frequency Trading; NASDAQ; Forex; Order Flows; Spillovers
JEL Codes: F31; G12; G14; G15; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| order flows from NASDAQ HFTs (C69) | order flows in the forex market (G15) |
| HFT order flows (C69) | market-wide information (G14) |
| HFTs trading aggressively on common information (G14) | stronger correlations between stock prices and forex rates (F31) |
| HFTs heightened trading activity (G14) | increased correlation between stock and forex rates (F31) |
| common risk factors (I12) | impact on stock prices and forex rates (F31) |