The multidisciplinary project, led by Mao Ye of University of Illinois at Urbana Champaign and Robert Sinkovits of the San Diego Supercomputing Center, funded as part of the OFR-NSF Partnership in Support of Research Collaborations in Finance Informatics aims to examine the impact of trading activity at the nanosecond (10-9 second) timeframe on financial system. This exploratory project aims to address two key questions: First, does competition in speed at the nanosecond level create or destroy social value? To be more specific, does an increase of speed improve our usual measures of market quality such as bid-ask spread, market depth, and market efficiency or does it increase levels of volatility and instability? Second, are there any new types of market manipulations in the nanosecond world? The project leverages powerful supercomputers to investigate abnormal trading activity and suspicious market events on the nanosecond timescale by constructing an order-by-order snapshot of financial markets with nanosecond-resolution time stamps.
The project aims to develop effective computational and analytic approaches to exploring whether new regulations are needed when trading occurs on a nanosecond scale, and if so, how to design optimal regulatory policies. This is a challenging problem due to both the endogenous relationship between liquidity, price discovery, order cancellation, and speed on the one hand and the massive amounts of data generated on the other. The research team plans to use exogenous technology shocks and NASDAQ channel assignment as identification strategy. By identifying exogenous technology shocks in the data, the team aims to establish the casual relationship between speed and market quality measures. They also use random NASDAQ channel assignment to examine whether there is abnormal co-movement in message flow within each channel, evidence consistent with quote stuffing.
In the recent years, equity markets experienced a number of problems related to high frequency trading, including the May 6, 2010 Flash Crash, the initial public offerings of BATS and Facebook, the losses by Knight Capital and more recently, the crash which was precipitated by a rumor originating on Twitter. However, little is known about the market impacts of trading on the nanosecond scale. Development of effective policies and alarm systems requires understanding of the causal relationships between trading patterns and their effects on the financial system. The project, if successful, will help identify and characterize policy options and market discipline to ensure a safe, sound, and fair financial system in a world where trades are made at lightening speeds. The project fosters interdisciplinary collaborations and research-based advanced training at the intersection of computer science, high performance computing, and finance. It enriches the curriculum and training of the next generation of researchers in the emerging interdisciplinary field of Finance Informatics.
