High-Frequency Trading and Extreme Price Movements

46 Pages Posted: 28 Nov 2014 Last revised: 10 Feb 2017

Jonathan Brogaard

University of Washington - Department of Finance and Business Economics

Allen Carrion

University of Utah - Department of Finance

Thibaut Moyaert

Louvain School of Management (UCL)

Ryan Riordan

Smith School of Business

Andriy Shkilko

Wilfrid Laurier University - Lazaridis School of Business and Economics

Konstantin Sokolov

Rochester Institute of Technology (RIT) - Saunders College of Business

Date Written: February 9, 2017

Abstract

Are endogenous liquidity providers (ELPs) reliable in times of market stress? We examine the activity of a common ELP type – high frequency traders (HFTs) – around extreme price movements (EPMs). We find that on average HFTs provide liquidity during EPMs by absorbing imbalances created by non-high frequency traders (nHFTs). Yet HFT liquidity provision is limited to EPMs in single stocks. When several stocks experience simultaneous EPMs, HFT liquidity demand dominates their supply. There is little evidence of HFTs causing EPMs.

Keywords: Extreme price movements, jumps, high-frequency trading

JEL Classification: G10, G14

Suggested Citation

Brogaard, Jonathan and Carrion, Allen and Moyaert, Thibaut and Riordan, Ryan and Shkilko, Andriy and Sokolov, Konstantin, High-Frequency Trading and Extreme Price Movements (February 9, 2017). Available at SSRN: https://ssrn.com/abstract=2531122 or http://dx.doi.org/10.2139/ssrn.2531122

Jonathan Brogaard

University of Washington - Department of Finance and Business Economics ( email )

Box 353226
Seattle, WA 98195
United States

Allen Carrion

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

Thibaut Moyaert

Louvain School of Management (UCL) ( email )

Belgium

Ryan Riordan

Smith School of Business ( email )

Smith School of Business, Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Andriy Shkilko (Contact Author)

Wilfrid Laurier University - Lazaridis School of Business and Economics ( email )

LH 4050
75 University Ave. W.
Waterloo, Ontario N2L3C5
Canada
519.884.0710 ext. 2462 (Phone)
519.884.0201 (Fax)

Konstantin Sokolov

Rochester Institute of Technology (RIT) - Saunders College of Business ( email )

105 Lomb Memorial Dr.
Rochester, NY 14623
United States

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