High-Frequency Trading around Large Institutional Orders

WFA Paper, 2016

48 Pages Posted: 18 Jun 2015 Last revised: 24 Feb 2016

Vincent van Kervel

Pontifical Catholic University of Chile; Tilburg Law and Economics Center (TILEC)

Albert J. Menkveld

VU University Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Date Written: January 29, 2016

Abstract

Liquidity suppliers lean against the wind. We analyze whether high-frequency traders (HFTs) lean against large institutional orders that execute through a series of child orders. The alternative is that HFTs go “with the wind” and trade in the same direction. We find that HFTs initially lean against orders but eventually turn around and go with them for long-lasting orders. This pattern explains why institutional trading cost is 46% lower when HFTs lean against the order (by one standard deviation) but 169% higher when they go with it. Further analysis supports recent theory, suggesting HFTs “back-run” on informed orders.

Keywords: HFT, Institutional investors, Implementation Shortfall

JEL Classification: G10, G14, G15

Suggested Citation

van Kervel, Vincent and Menkveld, Albert J., High-Frequency Trading around Large Institutional Orders (January 29, 2016). WFA Paper, 2016. Available at SSRN: https://ssrn.com/abstract=2619686 or http://dx.doi.org/10.2139/ssrn.2619686

Vincent Van Kervel (Contact Author)

Pontifical Catholic University of Chile ( email )

Av Libertador General Bernardo O'Higgins 340
Santiago, Región Metropolitana 8331150
Chile

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Albert J. Menkveld

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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