Price Informativeness and High Frequency Trading in Electronic Call Auction Markets
46 Pages Posted: 12 Jan 2018 Last revised: 20 Oct 2018
Date Written: March 17, 2018
Recent microstructure literature has indicated that, due to their speed advantage, high frequency traders (HFTs) are able to react first to news and price changes, thus inducing information asymmetry into the trading process. Despite their speed advantage, however, it is still unclear whether HFTs are able to form accurate signals about asset fair values. We propose to examine this issue in the call auction environment where speed-related trading is limited. Using the rational expectations framework of Kyle (1989), we derive sufficient conditions for the existence of fundamentally informed HFTs. We test whether these conditions hold in the Paris opening call using a HFT flagged database and find that informed HFTs are present in the market prior to the opening, driving the equilibrium price to the fair value of the stock.
Keywords: High Frequency Trading, Call Auction, Rational Expectations, Price Efficiency
JEL Classification: G1, G14
Suggested Citation: Suggested Citation