Mutual Fund Performance in the Era of High-Frequency Trading

49 Pages Posted: 3 Feb 2016 Last revised: 28 Mar 2018

See all articles by Nan Qin

Nan Qin

College of Business, Northern Illinois University

Vijay Singal

Virginia Tech

Date Written: October 1, 2017

Abstract

This paper shows that intensity of high-frequency trading (HFT) in stocks held by mutual funds is negatively related to fund performance. This negative relation can largely be explained by the illiquidity premium: HFT-intensive stocks provide lower returns because the majority of these stocks are relatively liquid. Further analysis shows that this relation is not a self-selection bias, but indicates a causality: intensive HFT is a key reason for the existence of significant illiquidity premium, because high-frequency traders are very sensitive to illiquidity due to their very short investment horizon. However, there is no evidence to support the widespread concern that HFT raises trading costs of mutual funds.

Keywords: high-frequency trading, mutual fund performance, illiquidity premium, trading costs

JEL Classification: G12, G14, G23

Suggested Citation

Qin, Nan and Singal, Vijay, Mutual Fund Performance in the Era of High-Frequency Trading (October 1, 2017). Available at SSRN: https://ssrn.com/abstract=2726427 or http://dx.doi.org/10.2139/ssrn.2726427

Nan Qin (Contact Author)

College of Business, Northern Illinois University

1425 W. Lincoln Hwy.
DEKALB, IL 60115
United States

Vijay Singal

Virginia Tech ( email )

250 Drillfield Drive
Blacksburg, VA 24061
United States
5402317750 (Phone)

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