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

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