J-REIT Market Quality: Impact of High Frequency Trading and the Financial Crisis

Using the introduction of Arrowhead low latency trading platform by Tokyo Stock Exchange as a natural experiment, I analyze the impact of high frequency trading on market quality of JREITs, in terms of liquidity, volatility, and systemic risks. I also analyze the impact of the 2008 financial crisis. The results document that while the crisis has significantly deteriorated the market quality, the J-REIT markets were resilient. Further, the introduction of Arrowhead improved the J-REIT market quality but has also increased the probability of flash crashes. Intraday patterns documented can be useful for appropriately timing trades to improve the execution quality. Finally, using difference-in-differences regression model, I show that since REITs have a higher transparency and better price discovery, they were much less affected by the financial crisis and Arrowhead as compared to non-REIT common stocks. JEL classification: G11; G12; G14; G15