High trading frequency boosts market efficiency but increases fragility, study finds.
The article explores how trading frequency affects market liquidity. The researchers developed a model where the shape and dynamics of a Limit Order Book (LOB) are determined by interactions between market participants. They found that higher trading frequency can increase market efficiency if traders provide liquidity, but it also makes markets more fragile. In high-frequency trading, traders only provide liquidity if they are market-neutral. These findings were supported by numerical examples.