Abstract

http://ssrn.com/abstract=1938769
 
 

References (41)



 
 

Citations (31)



 
 

Footnotes (15)



 


 



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


University of Ontario Institute of Technology - Faculty of Business and Information Technology

July 30, 2012

AFA 2013 San Diego Meetings Paper

Abstract:     
We examine the role of high-frequency traders (HFT) in price discovery and price efficiency. Overall HFT facilitate price efficiency by trading in the direction of permanent price changes and in the opposite direction of transitory pricing errors on average days and the highest volatility days. This is done through their marketable orders. In contrast, HFT liquidity-supplying non-marketable orders are adversely selected in terms of the permanent and transitory components as these trades are in the direction opposite to permanent price changes and in the same direction as transitory pricing errors. HFT predicts price changes in the overall market over short horizons measured in seconds. HFT 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: 45

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

JEL Classification: G12

working papers series


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Date posted: July 20, 2012 ; Last revised: August 1, 2012

Suggested Citation

Brogaard, Jonathan and Hendershott, Terrence and Riordan, Ryan, High Frequency Trading and Price Discovery (July 30, 2012). AFA 2013 San Diego Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1938769 or http://dx.doi.org/10.2139/ssrn.1938769

Contact Information

Jonathan Brogaard (Contact Author)
University of Washington - Department of Finance and Business Economics ( email )
Box 353200
Seattle, WA 98195
United States
Terrence J. Hendershott
University of California, Berkeley - Haas School of Business ( email )
545 Student Services Building
Berkeley, CA 94720
United States
Ryan Riordan
University of Ontario Institute of Technology - Faculty of Business and Information Technology ( email )
2000 Simcoe Street North
Oshawa, Ontario L1H 7K4
Canada
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References:  41
Citations:  31
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