High frequency trading and price discovery

Arbeitspapier

We examine empirically the role of high-frequency traders (HFTs) in price discovery and price efficiency. Based on our methodology, we find overall that 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.

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• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 1602

Classification and Topics

• Classification: Wirtschaft ; Asset Pricing; Trading Volume; Bond Interest Rates
• Subject: high frequency trading ; price discovery ; price formation ; pricing errors

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Brogaard, Jonathan ; Hendershott, Terrence ; Riordan, Ryan
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2013

Further information

• Handle: http://hdl.handle.net/10419/154035