Mutual Fund Performance in the Era of High-Frequency Trading
49 Pages Posted: 3 Feb 2016 Last revised: 28 Mar 2018
Date Written: October 1, 2017
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: Suggested Citation