Intraday volatility smile: Effects of fragmentation and high frequency trading on price efficiency

Stephanie Ligot (1) , Roland Gillet (1, 2) , Iryna Veryzhenko (1, 3)

1 PRISM Sorbonne - Pôle de recherche interdisciplinaire en sciences du management
2 ULB - Solvay Brussels School of Economics and Management [Brussels]
3 LIRSA - Laboratoire interdisciplinaire de recherche en sciences de l'action

In 2007, the European Markets in Financial Instruments Directive ended the national concentration rule. As a result, market fragmentation has accelerated across multiple trading venues. Spatial fragmentation might create opportunities and incentives for High Frequency arbitrageurs to fill the void left by the lack of Reg NMS type order routing requirements in Europe, without neglecting market integrity. This paper examines intra-day volatility and price efficiency through the metric of the normalized volatility ratio for the years 2006, 2012 and 2013 for Euronext Paris, BATS and Chi-X Europe. Our findings show that price determination remains inefficient at market opening due to the complexity of price discovery activity following a period of non-trading and heavy information releases. However, we demonstrate that an active participation of high-frequency traders significantly improves market efficiency at opening session.

Mots clés: Market efficiency; Intraday data; High-Frequency trading; Market efficiency

Domaines: Economies et finances

Stephanie Ligot, Roland Gillet, Iryna Veryzhenko. Intraday volatility smile: Effects of fragmentation and high frequency trading on price efficiency. Journal of International Financial Markets, Institutions and Money, 2021, 75, pp.101437. ⟨10.1016/j.intfin.2021.101437⟩. ⟨hal-03621248⟩