Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/154035
Authors: 
Brogaard, Jonathan
Hendershott, Terrence
Riordan, Ryan
Year of Publication: 
2013
Series/Report no.: 
ECB Working Paper 1602
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.
Subjects: 
high frequency trading
price discovery
price formation
pricing errors
JEL: 
G12
Document Type: 
Working Paper

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