High Frequency Market Making to Large Institutional Trades

Review of Financial Studies, (2019) vol. 32, no. 3, 1034-1067

52 Pages Posted: 28 Feb 2015 Last revised: 8 Feb 2019

Date Written: July 16, 2018


We study market-making high-frequency trader (HFT) dynamics around large institutional trades in Canadian equities markets using order-level data with masked trader identification. Following a regulatory change that negatively affected HFT order activity, we find that bid-ask spreads increased and price impact decreased for institutional trades. The decrease in price impact is strongest for informed institutional traders. During institutional trade executions, HFTs submit more same-direction orders and increase their inventory mean reversion rates. Our evidence indicates that high-frequency trading is associated with lower transaction costs for small, uninformed trades and higher transaction costs for large, informed trades.

Keywords: High Frequency Trading, HFT, Institutional Trades, Implementation Shortfall, Market Making, Liquidity Provision

JEL Classification: G1, G11, G18, G24

Suggested Citation

Korajczyk, Robert A. and Murphy, Dermot, High Frequency Market Making to Large Institutional Trades (July 16, 2018). Review of Financial Studies, (2019) vol. 32, no. 3, 1034-1067, Available at SSRN: https://ssrn.com/abstract=2567016 or http://dx.doi.org/10.2139/ssrn.2567016

Robert A. Korajczyk

Northwestern University - Kellogg School of Management ( email )

2211 Campus Drive, Room 4357
Evanston, IL 60208-0898
United States
847-491-8336 (Phone)
847-491-7781 (Fax)

HOME PAGE: http://www.kellogg.northwestern.edu/faculty/directory/korajczyk_robert.aspx#research

Dermot Murphy (Contact Author)

University of Illinois at Chicago ( email )

2114 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
312-355-4372 (Phone)

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

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