Do High-Frequency Traders Anticipate Buying and Selling Pressure?

Nicholas Hirschey ()
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Nicholas Hirschey: Department of Finance, London Business School, Regent’s Park, London NW1 4SA, United Kingdom

Management Science, 2021, vol. 67, issue 6, 3321-3345

Abstract: This study provides evidence that high-frequency traders (HFTs) identify patterns in past trades and orders that allow them to anticipate and trade ahead of other investors’ order flow. Specifically, HFTs’ aggressive purchases and sales lead those of other investors, and this effect is stronger at times when it is more difficult for non-HFTs to disguise their order flow. Consistent with some HFTs being more skilled or more focused on anticipatory strategies, I show that trades from a subset of HFTs consistently predict non-HFT order flow the best. The results are not explained by HFTs reacting faster to news or past returns, by contrarian or trend-chasing behavior by non-HFTs, or by trader misclassification. These findings support the existence of an anticipatory trading channel through which HFTs increase non-HFT trading costs.

Keywords: high-frequency traders; trading; information acquisition; liquidity; microstructure (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:67:y:2021:i:6:p:3321-3345

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