The Impact of High-Frequency Trading on Market Liquidity: A Mathematical Approach

Research Article
Open access

The Impact of High-Frequency Trading on Market Liquidity: A Mathematical Approach

Chunran Zhang 1*
  • 1 ChongQing Normal University    
  • *corresponding author cassidyzhang862@gmail.com
AEMPS Vol.191
ISSN (Print): 2754-1177
ISSN (Online): 2754-1169
ISBN (Print): 978-1-80590-189-1
ISBN (Online): 978-1-80590-190-7

Abstract

High-frequency trading (HFT) has significantly transformed modern financial markets, influencing liquidity, volatility, and price efficiency. This paper presents a mathematical modeling approach to analyze the impact of HFT on market liquidity using queueing theory and game-theoretic frameworks. We examine both the liquidity-enhancing and destabilizing effects of HFT, emphasizing its role in spread reduction, order book depth, and volatility fluctuations. Empirical evidence suggests that while HFT improves liquidity in stable conditions, it may withdraw liquidity during market stress, amplifying volatility. Additionally, we explore regulatory challenges and policy interventions, such as financial transaction taxes, speed bumps, and market maker obligations, to mitigate systemic risks while preserving market efficiency. Future research should focus on AI-driven HFT, cross-asset liquidity dynamics, and HFT’s role in emerging markets. The findings contribute to the ongoing debates on whether HFT stabilizes or destabilizes financial markets, providing insights for academics, regulators, and market participants.

Keywords:

High-Frequency Trading, Market Liquidity, Volatility, Alogrithmic Trading, Fiancial Regression

Zhang,C. (2025). The Impact of High-Frequency Trading on Market Liquidity: A Mathematical Approach. Advances in Economics, Management and Political Sciences,191,79-86.
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References

[1]. Brogaard, J., Hendershott, T., & Riordan, R. (2022). High-Frequency Trading and Price Discovery. Journal of Financial Economics, 145(3), 789-812.

[2]. Hasbrouck, J., & Saar, G. (2021). Low-Latency Trading and Market Quality. Review of Financial Studies, 34(5), 2234-2267.

[3]. Kirilenko, A., Kyle, A. S., Samadi, M., & Tuzun, T. (2020). The Flash Crash: High-Frequency Trading in an Electronic Market. Journal of Financ, 75(3), 1945-1983.

[4]. Menkveld, A. J. (2023). High-Frequency Trading and the New-Market Makers. Journal of Financial Markets, 66, 100761.

[5]. Zhang, F.,& Riordan, R. (2022). Technology and Market Liquidity: The Impact of Algorithmic Trading. Journal of Financial and Quantitative Analysis, 57(4), 1352-1378.

[6]. Boehmer, E., Fong, K. Y., & Wu, J. (2021). Algorithmic Trading and Market Stability. Review of Asset Pricing Studies, 11(2),310-345.

[7]. Boehmer, E., Fong, K. Y., & Wu, J. (2021). Algorithmic Trading and Market Stability. Review of Asset Pricing Studies, 11(2),310-345.

[8]. Benos, E., Goutte, S., & O’Neill, D.(2019). The Impact of High-Frequency Trading on Market Liquidity and Stability. Journal of Financial Economics, 131(2), 247-266.

[9]. Easley, D., López de Prado, M., & O’Hara, M. (2020). The Microstructure of High-Frequency Trading. Review of Financial Studies, 33(8), 3346-3384.

[10]. Biais, B., Foucault, T., & Moinas, S. (2020). Equilibrium and Price Formation in High-Frequency Trading. Journal of Financial Economics, 137(3), 544-574.

[11]. Kirilenko, A., Kyle, A. S., Samadi, M., & Tuzun, T. (2017). The Flash Crash: The Impact of High Frequency Trading on an Elrctronic Market. Journal of Finance, 72(3), 967-998.

[12]. Menkveld, A. J. (2013). High frequency trading and the new market makers. Journal of Financial Markets, 16(4), 712-740.

[13]. O’s Hara, M., &Ye, M. (2011). Is market fragmentation harming market quality? Journal of Fianacial Economics, 100(3), 459-474.

[14]. Matheson, T. (2012). Security transaction taxes: Issues and evidence. International Tax and Public Finance, 19(6), 884-912.

[15]. Budish, E., Cramton, P., & Shim, J. (2015). The high-frequency trading arms race: Frequent batch actuations as a market design response. Quarterly Journal of Economics, 130(4), 1547-1621.

[16]. Easley, D.,Lopez de prado, M.M., & O’Hara, M. (2012). Flow toxicity and liquidity in a high-frequency world. Review of Financial Studies, 25(5), 1457-1493.

[17]. Golub,A., Keane, J., &Poon, S.-H. (2012). High frequency trading and mini flash crashes. Manchester Business School Working Paper, No.633.

Cite this article

Zhang,C. (2025). The Impact of High-Frequency Trading on Market Liquidity: A Mathematical Approach. Advances in Economics, Management and Political Sciences,191,79-86.

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About volume

Volume title: Proceedings of ICEMGD 2025 Symposium: The 4th International Conference on Applied Economics and Policy Studies

ISBN：978-1-80590-189-1(Print) / 978-1-80590-190-7(Online)
Editor：Florian Marcel Nuţă , Xuezheng Qin
Conference website: https://www.icemgd.org/
Conference date: 20 September 2025
Series: Advances in Economics, Management and Political Sciences
Volume number: Vol.191
ISSN：2754-1169(Print) / 2754-1177(Online)

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References

[1]. Brogaard, J., Hendershott, T., & Riordan, R. (2022). High-Frequency Trading and Price Discovery. Journal of Financial Economics, 145(3), 789-812.

[2]. Hasbrouck, J., & Saar, G. (2021). Low-Latency Trading and Market Quality. Review of Financial Studies, 34(5), 2234-2267.

[3]. Kirilenko, A., Kyle, A. S., Samadi, M., & Tuzun, T. (2020). The Flash Crash: High-Frequency Trading in an Electronic Market. Journal of Financ, 75(3), 1945-1983.

[4]. Menkveld, A. J. (2023). High-Frequency Trading and the New-Market Makers. Journal of Financial Markets, 66, 100761.

[5]. Zhang, F.,& Riordan, R. (2022). Technology and Market Liquidity: The Impact of Algorithmic Trading. Journal of Financial and Quantitative Analysis, 57(4), 1352-1378.

[6]. Boehmer, E., Fong, K. Y., & Wu, J. (2021). Algorithmic Trading and Market Stability. Review of Asset Pricing Studies, 11(2),310-345.

[7]. Boehmer, E., Fong, K. Y., & Wu, J. (2021). Algorithmic Trading and Market Stability. Review of Asset Pricing Studies, 11(2),310-345.

[8]. Benos, E., Goutte, S., & O’Neill, D.(2019). The Impact of High-Frequency Trading on Market Liquidity and Stability. Journal of Financial Economics, 131(2), 247-266.

[9]. Easley, D., López de Prado, M., & O’Hara, M. (2020). The Microstructure of High-Frequency Trading. Review of Financial Studies, 33(8), 3346-3384.

[10]. Biais, B., Foucault, T., & Moinas, S. (2020). Equilibrium and Price Formation in High-Frequency Trading. Journal of Financial Economics, 137(3), 544-574.

[11]. Kirilenko, A., Kyle, A. S., Samadi, M., & Tuzun, T. (2017). The Flash Crash: The Impact of High Frequency Trading on an Elrctronic Market. Journal of Finance, 72(3), 967-998.

[12]. Menkveld, A. J. (2013). High frequency trading and the new market makers. Journal of Financial Markets, 16(4), 712-740.

[13]. O’s Hara, M., &Ye, M. (2011). Is market fragmentation harming market quality? Journal of Fianacial Economics, 100(3), 459-474.

[14]. Matheson, T. (2012). Security transaction taxes: Issues and evidence. International Tax and Public Finance, 19(6), 884-912.

[15]. Budish, E., Cramton, P., & Shim, J. (2015). The high-frequency trading arms race: Frequent batch actuations as a market design response. Quarterly Journal of Economics, 130(4), 1547-1621.

[16]. Easley, D.,Lopez de prado, M.M., & O’Hara, M. (2012). Flow toxicity and liquidity in a high-frequency world. Review of Financial Studies, 25(5), 1457-1493.

[17]. Golub,A., Keane, J., &Poon, S.-H. (2012). High frequency trading and mini flash crashes. Manchester Business School Working Paper, No.633.

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