Price Discovery and the Cross-section of High-Frequency Trading

44 Pages Posted: 5 Dec 2012 Last revised: 12 Mar 2016

Evangelos Benos

Bank of England

Satchit Sagade

Goethe University Frankfurt - Department of Finance; Goethe University Frankfurt - Research Center SAFE

Date Written: March 11, 2016

Abstract

We quantify the price discovery contributions of high-frequency traders (HFTs) in the United Kingdom equity market and examine how it varies in their cross-section. For this, we group individual HFTs according to their liquidity taking/making activity. HFTs contribute about 14\% of all trade-induced information, with aggressive HFTs accounting for two-thirds of this contribution. This suggests that HFTs who pursue strategies that require the use of aggressive trades are most informed, as opposed to passive HFTs who more likely act as market-makers. However, information shares decline with the amount of aggressive volume, suggesting that these trading strategies are not scalable.

Keywords: High-Frequency Trading, Price Discovery

JEL Classification: G10

Suggested Citation

Benos, Evangelos and Sagade, Satchit, Price Discovery and the Cross-section of High-Frequency Trading (March 11, 2016). Journal of Financial Markets, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2184302 or http://dx.doi.org/10.2139/ssrn.2184302

Evangelos Benos (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Satchit Sagade

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany
+49 69 798 30085 (Phone)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 30085 (Phone)

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