Do High-Frequency Traders Anticipate Buying and Selling Pressure?

79 Pages Posted: 24 Mar 2013 Last revised: 28 May 2016

Nicholas Hirschey

London Business School

Date Written: May 26, 2016

Abstract

This study tests the hypothesis that high-frequency traders (HFTs) identify patterns that allow them to anticipate and trade ahead of other investors’ order flow. HFTs’ aggressive purchases and sales lead those of other investors. The effect is consistently stronger for a subset of HFTs and at times when non-HFTs are hypothesized to be less focused on disguising order flow. These results are not fully explained by HFTs reacting faster to signals that non-HFTs also observe such as news, contrarian or trend-chasing behavior by non-HFTs, and trader misclassification. These findings support the existence of an anticipatory trading channel through which HFTs may increase non-HFT trading costs.

JEL Classification: G10, G14

Suggested Citation

Hirschey, Nicholas, Do High-Frequency Traders Anticipate Buying and Selling Pressure? (May 26, 2016). Available at SSRN: https://ssrn.com/abstract=2238516 or http://dx.doi.org/10.2139/ssrn.2238516

Nicholas Hirschey (Contact Author)

London Business School ( email )

London Business School
United States

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