High Frequency Trading, Information, and Takeovers
CentER Discussion Paper Series No. 2011-047
49 Pages Posted: 14 May 2011 Last revised: 18 Jan 2012
Date Written: April 3, 2011
This paper (1) proposes new variables to detect informed high-frequency trading (HFT), (2) shows that HFT can help to predict takeover targets, and (3) shows that HFT influences target announcement returns. Prior literature suggests that informed trade may occur before takeovers, but has not examined the role of HFT and has relied on monthly measures of informed trade (such as PIN or the spread components). I propose microstructure-based variables to detect HFT that are derived from hazard modeling and from VWAP trading algorithms. I show that these can help predict takeover targets and are significantly related to target announcement returns. This highlights the existence of pre-takeover informed trade and the need to control for it when analyzing takeover returns.
Keywords: High Frequency Trading, Takeovers, Algorithmic Trading
JEL Classification: G12, G14, G18, G34, K22
Suggested Citation: Suggested Citation