High-Frequency Trading and Price Informativeness

69 Pages Posted: 24 Mar 2019

See all articles by Jasmin Gider

Jasmin Gider

Tilburg University - School of Economics and Management

Simon Schmickler

Princeton University, Department of Economics

Christian Westheide

University of Vienna - Department of Finance; Goethe University Frankfurt - Research Center SAFE

Date Written: March 9, 2019

Abstract

We study how the informativeness of stock prices changes with the presence of high-frequency trading (HFT). Our estimate is based on the staggered start of HFT participation in a panel of international exchanges. With HFT presence, market prices are a less reliable predictor of future cash flows and investment, even more so for longer horizons. Further, firm-level idiosyncratic volatility decreases, and the holdings and trades by institutional investors deviate less from the market-capitalization weighted portfolio as a benchmark. Our results document that the informativeness of prices decreases subsequent to the start of HFT. These findings are consistent with theoretical models of HFTs' ability to anticipate informed order flow, resulting in decreased incentives to acquire fundamental information.

Keywords: High-Frequency Trading, Price Efficiency, Information Acquisition, Information Production

JEL Classification: G10, G14

Suggested Citation

Gider, Jasmin and Schmickler, Simon and Westheide, Christian, High-Frequency Trading and Price Informativeness (March 9, 2019). Available at SSRN: https://ssrn.com/abstract=3349653

Jasmin Gider (Contact Author)

Tilburg University - School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Simon Schmickler

Princeton University, Department of Economics ( email )

Princeton, NJ
United States

Christian Westheide

University of Vienna - Department of Finance ( email )

Bruennerstrasse 72
Vienna, 1210
Austria

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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