High Frequency Trading and Price Discovery
Preprint
- 1 January 2012
- preprint
- Published by Elsevier in SSRN Electronic Journal
Abstract
We examine the role of high-frequency traders (HFTs) in price discovery and price efficiency. Overall HFTs facilitate price efficiency by trading in the direction of permanent price changes and in the opposite direction of transitory pricing errors, both on average and on the highest volatility days. This is done through their liquidity demanding orders. In contrast, HFTs’ liquidity supplying orders are adversely selected. The direction of buying and selling by HFTs predicts price changes over short horizons measured in seconds. The direction of HFTs’ trading is correlated with public information, such as macro news announcements, market-wide price movements, and limit order book imbalances.Keywords
All Related Versions
This publication has 41 references indexed in Scilit:
- Trading Fees and Efficiency in Limit Order MarketsThe Review of Financial Studies, 2012
- International Evidence on Algorithmic TradingSSRN Electronic Journal, 2012
- Equilibrium High-Frequency TradingSSRN Electronic Journal, 2012
- Catching Falling Knives: Speculating on Market OverreactionSSRN Electronic Journal, 2012
- Where is the Value in High Frequency Trading?SSRN Electronic Journal, 2011
- The Microstructure of the “Flash Crash”: Flow Toxicity, Liquidity Crashes, and the Probability of Informed TradingThe Journal of Portfolio Management, 2011
- Rise of the Machines: Algorithmic Trading in the Foreign Exchange MarketSSRN Electronic Journal, 2011
- The information content of an open limit‐order bookJournal of Futures Markets, 2008
- Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign ExchangeAmerican Economic Review, 2003
- Dealership marketJournal of Financial Economics, 1980