The role of HFTs in order flow toxicity and stock price variance, and predicting changes in HFTs’ liquidity provisions

This study examines relations between high frequency trading, order flow toxicity, stock price volatility during normal and high order flow toxicity periods, and the predictability of changes in high frequency traders’ liquidity supply and demand. By employing volume-synchronized probability of info...

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Veröffentlicht in:Journal of economics and finance 2017-10, Vol.41 (4), p.739-762
Hauptverfasser: Van Ness, Bonnie F., Van Ness, Robert A., Yildiz, Serhat
Format: Artikel
Sprache:eng
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Zusammenfassung:This study examines relations between high frequency trading, order flow toxicity, stock price volatility during normal and high order flow toxicity periods, and the predictability of changes in high frequency traders’ liquidity supply and demand. By employing volume-synchronized probability of informed trading (VPIN), a flow toxicity metric, we find a negative relation between high frequency trading and order flow toxicity. Our results also show that VPIN can be a good predictor of high frequency traders’ liquidity supply and demand changes. Finally, we find that high frequency traders’ impact on stock price variance is not uniform and change with order flow toxicity levels and stock volume.
ISSN:1055-0925
1938-9744
DOI:10.1007/s12197-016-9374-6