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High-Frequency Trading around Large Institutional Orders

WFA Paper, 2016

51 Pages Posted: 18 Jun 2015 Last revised: 27 Sep 2017

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: September 26, 2017

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 HFTs trading "with the wind," that is, in the same direction. We find that HFTs initially lean against these orders but eventually change direction and take position in the same direction for the most informed institutional orders. Our empirical findings are consistent with investors trading strategically on their information. When deciding trade intensity, they seem to trade off higher speculative profit against higher risk of detection by HFTs and being preyed on.

Keywords: High-frequency traders, institutional investors, trading patterns, transaction cost

JEL Classification: G10, G14, G15

Suggested Citation

van Kervel, Vincent and Menkveld, Albert J., High-Frequency Trading around Large Institutional Orders (September 26, 2017). 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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