High frequency trading and price discovery

Jonathan Brogaard, Terrence Hendershott and Ryan Riordan

No 1602, Working Paper Series from European Central Bank

Abstract: 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. JEL Classification: G12

Keywords: high frequency trading; price discovery; price formation; pricing errors (search for similar items in EconPapers)
Date: 2013-11
New Economics Papers: this item is included in nep-mst
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Citations: View citations in EconPapers (35)

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Journal Article: High-Frequency Trading and Price Discovery (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20131602

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