High-Frequency Traders and Price Informativeness during Earnings Announcements
Review of Accounting Studies, Forthcoming
63 Pages Posted: 9 Jul 2016 Last revised: 26 May 2020
Date Written: May 22, 2020
Prompted by concerns that high frequency traders (HFTs) reap unfair advantages over other traders by using faster trading technologies, regulators are contemplating measures to slow down equity markets. Currently, HFTs account for a significant fraction of the total market volume. Although regulatory proposals are aimed at curbing HFTs’ ultra-low-latency activities, research suggests that HFTs play various other roles in markets, including liquidity provision as voluntary market makers. However, little is known about their role in incorporating firm-specific fundamental information into prices. Employing a novel dataset that identifies trades by HFTs and non-HFTs, we investigate whether HFTs facilitate incorporation of longer-term fundamental information revealed via earnings announcements. We find that earnings response coefficients are larger and abnormal price impact of trades is lower when HFTs trade more following earnings announcements, suggesting that HFTs facilitate efficient assimilation of earnings news. HFTs also enhance the forecasting capabilities of financial analysts; specifically forecast dispersion is lower and forecast revision speed is faster for announcements with greater HFT presence. Furthermore, HFT participation increases return synchronicity around earnings announcements when multiple firms in the same industry announce earnings on the same day, suggesting that HFTs help incorporate relevant industry information. This effect arises from HFTs’ liquidity supplying function. We address the endogenous preference of HFTs for large and liquid stocks by including multiple controls for size and liquidity, implementing abnormal or change specification for the price impact tests, and performing pre-treatment placebo tests for all of our analyses.
Keywords: High Frequency Trading; earnings announcements; earnings response coefficient; price impact of trades; analyst forecast
JEL Classification: D53; G12; G14; M41
Suggested Citation: Suggested Citation