Author(s)

YiChen Liu^*, Wei Zhang, Benjamin Carter

Affiliation(s)

Department of Finance, Fisher College of Business, Ohio State University, USA.

Corresponding Author

YiChen Liu

ABSTRACT

The proliferation of high-frequency trading (HFT) has fundamentally transformed modern financial market microstructure, raising important questions about its impact on intraday volatility dynamics. This study examines the complex relationship between HFT algorithms and intraday market volatility through comprehensive analysis of market microstructure data spanning multiple markets and time periods. Our investigation reveals that HFT exhibits a dual nature: under stable market conditions, increased HFT activity is associated with reduced intraday volatility and improved liquidity provision; however, during periods of market stress and intraday crashes, HFT algorithms can amplify volatility through rapid order cancellations and liquidity withdrawals. Empirical evidence from European equity markets demonstrates that HFT participation has grown substantially from 2011 to 2013, with large-cap stocks exhibiting HFT activity levels ranging from 40% to 80% of total trading activity. Our analysis reveals strong positive correlations between HFT profitability and both trading volume and market volatility, with correlation coefficients exceeding 0.80 for volume relationships and 0.66 for volatility relationships. These findings indicate that while HFT provides substantial benefits in terms of reduced bid-ask spreads and enhanced price discovery under normal conditions, algorithmic interactions during extreme events create feedback loops that exacerbate price movements. The results have significant implications for market regulators and institutional investors seeking to understand the evolving dynamics of modern electronic markets and the necessity for appropriate regulatory frameworks that balance innovation with market stability.

KEYWORDS

High-frequency trading; Algorithmic trading; Intraday volatility; Market microstructure; Liquidity provision; Price discovery; Market stability

CITE THIS PAPER

YiChen Liu, Wei Zhang, Benjamin Carter. High-frequency trading algorithms and their effects on intraday market volatility. World Journal of Information and Knowledge Management. 2025, 3(1): 17-27. DOI: https://doi.org/10.61784/wjikm3027.

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