How Stock HFT Can Widen Options Spreads Across Markets
Summary
The document summarizes research on how high-frequency trading in equities affects liquidity in options on those stocks. The study combines Nasdaq HFT records with options transaction data and other market data for 103 stocks, then uses instrumental-variable and two-stage least-squares methods to address potential endogeneity. It reports that aggressive, liquidity-demanding HFT is associated with wider option spreads, while liquidity-supplying HFT shows no significant effect.
The proposed mechanisms are latency arbitrage, in which fast traders exploit stale options quotes after stock-price moves, and informed trading that links activity across the two markets. The summary says the effect is stronger where profitable put-call parity violations are more frequent, and that an external event analysis supports the informed-trading channel. These findings concern the data and period described, including 2009 market observations; they do not establish that the same effects hold across later market structures or all securities.
Key ideas
- The study examines cross-market effects of equity HFT on options liquidity.
- Aggressive HFT is reported to coincide with wider options bid-ask spreads, while liquidity-supplying HFT has no significant reported effect.
- Latency arbitrage may occur when options quotes lag movements in the underlying stock.
- Put-call parity violations are used to assess whether stale-quote opportunities help explain the spread effect.
- The evidence comes from a historical sample and may not generalize to current markets.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.