Need for Speed: An Empirical Analysis of Hard and Soft Information in a High Frequency World

Abstract

We study the role of high frequency traders (HFTs) and non-HFTs in processing hard index price information and soft news information. On one side, we show that HFTs dominate non-HFTs in processing hard information by exhibiting a stronger reaction after the hard information shocks. Thereby, they function as 'messengers' between the futures and stock markets and create a stronger linkage between both markets. We demonstrate that speed matters for hard information processing and realizing trading gains because of high short-run trading profits. On the other side, soft news information is primarily processed by non-HFTs and is incorporated into stock prices for a longer amount of time.

Keywords: high-frequency trading, algorithmic trading, information, news trading, price discovery

JEL Classification: G10, G14