The Role of HFTs in Order Flow Toxicity and Stock Price Variance, and Predicting Changes in HFTs’ Liquidity Provisions

38 Pages Posted: 25 Feb 2016

See all articles by Serhat Yildiz

Serhat Yildiz

University of Nevada, Reno

Robert A. Van Ness

University of Mississippi - Department of Finance

Bonnie F. Van Ness

University of Mississippi - Department of Finance

Date Written: February 23, 2016

Abstract

This study examines relations between high frequency trading, order flow toxicity, stock price volatility during normal and high order flow toxicity periods, and predictability of changes in high frequency traders’ liquidity supply and demand. By employing Volume-synchronized probability of informed trading (VPIN) flow toxicity metric, we find a negative relation between high frequency trading and order flow toxicity. Our results also show that VPIN can be a good predictor of high frequency traders’ liquidity supply and demand changes. Finally, we find that high frequency traders’ impacts on stock price variance are not uniform and change with order flow toxicity levels of markets and stock volume.

Keywords: High frequency trading, HFT, Volume-synchronized probability of informed trading, VPIN, liquidity, order flow toxicity

Suggested Citation

Yildiz, Serhat and Van Ness, Robert A. and Van Ness, Bonnie F., The Role of HFTs in Order Flow Toxicity and Stock Price Variance, and Predicting Changes in HFTs’ Liquidity Provisions (February 23, 2016). Available at SSRN: https://ssrn.com/abstract=2737457 or http://dx.doi.org/10.2139/ssrn.2737457

Serhat Yildiz

University of Nevada, Reno ( email )

1664 N. Virginia St
Reno, NV 89557
United States

Robert A. Van Ness (Contact Author)

University of Mississippi - Department of Finance ( email )

Oxford, MS 38677
United States

Bonnie F. Van Ness

University of Mississippi - Department of Finance ( email )

Oxford, MS 38677
United States
662-915-6749 (Phone)
662-915-7968 (Fax)

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