Price discovery and the cross-section of high-frequency trading

Benos, Evangelos; Sagade, Satchit

Abstract

We quantify the price discovery contribution of high-frequency traders (HFTs) in the United Kingdom equity market and examine how it varies in their cross-section. For this, we group individual HFTs according to their liquidity taking/making activity. HFTs contribute about 14% of all trade-induced information, with aggressive HFTs accounting for two-thirds of this contribution. This suggests that HFTs who pursue strategies that require use of aggressive trades are the most informed, as opposed to passive HFTs who more likely act as market makers. However, information shares decline with the amount of aggressive volume, suggesting that HFTs' news trading strategies are not scalable. JEL classification: G10

Citation

Benos, E., & Sagade, S. (2016). Price discovery and the cross-section of high-frequency trading. Journal of Financial Markets, 30, 54-77. https://doi.org/10.1016/j.finmar.2016.03.004

• Journal Article Type: Article
• Acceptance Date: Mar 17, 2016
• Online Publication Date: Mar 24, 2016
• Publication Date: Sep 16, 2016
• Deposit Date: Apr 23, 2020
• Publicly Available Date: May 6, 2020
• Journal: Journal of Financial Markets
• Print ISSN: 1386-4181
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 30
• Pages: 54-77
• DOI: https://doi.org/10.1016/j.finmar.2016.03.004
• Public URL: https://nottingham-repository.worktribe.com/output/4330072
• Publisher URL: https://www.sciencedirect.com/science/article/abs/pii/S1386418116300672