Machines vs. Machines: High Frequency Trading and Hard Information

57 Pages Posted: 13 May 2014

See all articles by Yesol Huh

Yesol Huh

Board of Governors of the Federal Reserve System - Division of Research and Statistics

Date Written: March 4, 2014

Abstract

In today's markets where high frequency traders (HFTs) both provide and take liquidity, what influences HFTs' liquidity provision? I argue that information asymmetry induced by liquidity-taking HFTs' use of machine-readable information is important. Applying a novel statistical approach to measure HFT activity and using a natural experiment of index inclusion, I show that liquidity-providing HFTs supply less liquidity to stocks that suffer more from this information asymmetry problem. Moreover, when markets are volatile, this information asymmetry problem becomes more severe, and HFTs supply less liquidity. I discuss implications for market-making activity in times of market stress and for HFT regulations.

Keywords: High frequency trading, liquidity, market microstructure, information asymmetry

JEL Classification: G19

Suggested Citation

Huh, Yesol, Machines vs. Machines: High Frequency Trading and Hard Information (March 4, 2014). FEDS Working Paper No. 2014-33. Available at SSRN: https://ssrn.com/abstract=2436048 or http://dx.doi.org/10.2139/ssrn.2436048

Yesol Huh (Contact Author)

Board of Governors of the Federal Reserve System - Division of Research and Statistics ( email )

20th and C Streets, NW
Washington, DC 20551
United States
(202) 973-6943 (Phone)

HOME PAGE: http://sites.google.com/site/yesolhuh

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