Earnings Announcements in High Speed Markets: Do High Frequency Traders Bring Fundamental Information into Prices?
58 Pages Posted: 9 Jul 2016 Last revised: 21 Apr 2018
Date Written: April 1, 2018
The growing influence of high frequency traders (HFTs) in modern markets and the lightning speed of their trade executions are the source of much debate among regulators and practitioners. Recent literature examining HFTs’ impact on price efficiency focuses on very short (sub-second-level) time intervals and yields mixed results. Consequently, whether HFTs facilitate incorporation of longer-term fundamental information revealed via earnings announcements remains unanswered. Employing a novel dataset obtained from Nasdaq that identifies trades by HFTs and non-HFTs, we find that earnings response coefficients are larger, analyst forecast dispersion is reduced, forecast revision speed is faster, and abnormal price impact of trades is lower for announcements with greater HFT participation. We also find that 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 value relevant information from simultaneous earnings releases of other firms. Furthermore, we find that the increase in return synchronicity is attributable to HFTs’ role as liquidity providers (i.e., they act as modern day market makers). We address the endogenous preference of HFTs for large and liquid stocks by including multiple proxies of size and liquidity as controls, and implementing abnormal or change specification for the price impact measure. In addition, we perform pre-treatment placebo tests for all of our analyses over a window preceding our sample period when HFT was nascent. Our results are robust to this battery of sensitivity tests suggesting that HFTs facilitate efficient assimilation of earnings information.
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