Abstract

http://ssrn.com/abstract=1928510
 
 

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High Frequency Trading and Price Discovery


Jonathan Brogaard


University of Washington - Department of Finance and Business Economics

Terrence Hendershott


University of California, Berkeley - Haas School of Business

Ryan Riordan


Queen's School of Business

April 22, 2013


Abstract:     
We examine the role of high-frequency traders (HFTs) in price discovery and price efficiency. Overall 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.

Number of Pages in PDF File: 61

Keywords: high frequency trading, price formation, price discovery, pricing errors

JEL Classification: G12

working papers series





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Date posted: October 12, 2011 ; Last revised: April 26, 2013

Suggested Citation

Brogaard, Jonathan and Hendershott, Terrence and Riordan, Ryan, High Frequency Trading and Price Discovery (April 22, 2013). Available at SSRN: http://ssrn.com/abstract=1928510 or http://dx.doi.org/10.2139/ssrn.1928510

Contact Information

Jonathan Brogaard
University of Washington - Department of Finance and Business Economics ( email )
Box 353226
Seattle, WA 98195
United States
Terrence J. Hendershott
University of California, Berkeley - Haas School of Business ( email )
545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
Ryan Riordan (Contact Author)
Queen's School of Business ( email )
Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

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