Are High–Frequency Traders Informed?

Posted: 12 Jan 2018 Last revised: 30 Sep 2020

See all articles by Panagiotis Anagnostidis

Panagiotis Anagnostidis

Institut Europlace de Finance (IEF) and European Financial Data Institute (EUROFIDAI)

Patrice C. Fontaine

Eurofidai (CNRS)

Christos Varsakelis

Catholic University of Louvain (UCL)

Date Written: March 17, 2018

Abstract

Are high–frequency traders (HFTs) informed? To address this question, we examine HFTs’ activity in the call auction environment, where speed-related trading is limited and signal processing capacity becomes more relevant. To model the call market, we consider the Kyle (1989) rational expectations framework for strategic trading. The test we propose for detecting informed HFTs in this market assesses potential deviations of the informativeness of HFTs’ aggregate (net) demand, from the informativeness of the aggregate demand submitted by the rest of the traders. Data from the Euronext Paris preopening phase indicate that informed HFTs are present in the market just before the opening. Our results provide useful guidance for the assessment of the influence of HFTs’ quotes on price quality, an important issue for market regulators and policy makers.

Keywords: High Frequency Trading, Call Auction, Rational Expectations, Price Efficiency

JEL Classification: G1; G14

Suggested Citation

Anagnostidis, Panagiotis and Fontaine, Patrice C. and Varsakelis, Christos, Are High–Frequency Traders Informed? (March 17, 2018). Economic Modelling 93 (2020), 365-383 , Available at SSRN: https://ssrn.com/abstract=3098718 or http://dx.doi.org/10.2139/ssrn.3098718

Panagiotis Anagnostidis

Institut Europlace de Finance (IEF) and European Financial Data Institute (EUROFIDAI) ( email )

Grenoble
France

Patrice C. Fontaine (Contact Author)

Eurofidai (CNRS) ( email )

150, rue de la Chimie - EUROFIDAI UMS CNRS 2748
UGA domaine universitaire
Grenoble Cedex 9, 38058
France

Christos Varsakelis

Catholic University of Louvain (UCL) ( email )

Place Montesquieu, 3
Louvain-la-Neuve, 1348
Belgium

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