Do High-Frequency Traders Anticipate Buying and Selling Pressure?

58 Pages Posted: 24 Mar 2013 Last revised: 28 Apr 2020

See all articles by Nicholas Hirschey

Nicholas Hirschey

Nova School of Business and Economics

Date Written: January 1, 2020

Abstract

This study provides evidence that high-frequency traders (HFTs) identify patterns in past trades and orders that allow them to anticipate and trade ahead of other investors' order flow. Specifically, HFTs' aggressive purchases and sales lead those of other investors, and this effect is stronger at times when it is more difficult for non-HFTs to disguise their order flow. There is also persistence in which HFTs' trading predicts non-HFT order flow the best, indicating a subset of HFTs are either more skilled or more focused on anticipatory strategies. The results are not explained by HFTs reacting faster to news or past returns, by contrarian or trend-chasing behavior by non-HFTs, or by trader misclassification. These findings support the existence of an anticipatory trading channel through which HFTs increase non-HFT trading costs.

JEL Classification: G10, G14

Suggested Citation

Hirschey, Nicholas, Do High-Frequency Traders Anticipate Buying and Selling Pressure? (January 1, 2020). Available at SSRN: https://ssrn.com/abstract=2238516 or http://dx.doi.org/10.2139/ssrn.2238516

Nicholas Hirschey (Contact Author)

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

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