A Blessing or a Curse? The Impact of High Frequency Trading on Institutional Investors
Fordham University - Finance Area
January 8, 2015
European Finance Association Annual Meetings 2014 Paper Series
This study provides evidence that HFT increases the trading costs of traditional institutional investors. One standard deviation increase in the intensity of HFT activities increases institutional execution shortfall costs by a third. Various analyses rule out an alternative explanation of reverse causality. Further evidence suggests that HFT represents as an ephemeral and extra-expensive source of liquidity provision when demand and supply among institutional investors are imbalanced, and that the impact on institutional trading costs is most pronounced when HF traders engage in directional strategies. Finally, I find that institutional trading skills matter for alleviating the adverse impact of HFT.
Number of Pages in PDF File: 53
Keywords: High frequency trading, Institutional investors, Trading costs
Date posted: September 25, 2013 ; Last revised: February 28, 2015
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