Analyzing Information and Value Flows in High-Frequency Capital Markets

High-frequency trading has significant influence on today’s capital markets and has received massive attention in the media. This research aims to provide a conceptual understanding of high-frequency capital markets by analysing information and value flows between relevant high-frequency trading market participants. In a first step, market participants including traders, brokers, market platforms, technology providers, information providers, and clearing agencies are introduced. Second, the trading process is described focusing on the three most important phases, namely the information phase, order routing phase, and order matching phase. Furthermore, we review widely adopted high-frequency trading strategies such as market making, arbitrage trading, and pinging. Expert interviews are used to provide practical insights on the perception of high-frequency trading and the necessity for improved regulation. We merge theoretical knowledge and our findings from practice to develop the HFT Value Information Framework visualizing information and value flows between market participants. We discuss the interrelations between market participants in current high-frequency capital markets and describe implications for different stakeholders. Finally, the implications for regulatory bodies are discussed and possible future research opportunities are identified.