High-Frequency Trading and Price Informativeness

68 Pages Posted: 24 Mar 2019 Last revised: 15 Jul 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 stock price informativeness 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, idiosyncratic volatility decreases, mutual funds trade less actively and their holdings deviate less from the market-capitalization weighted portfolio. These findings suggest that price informativeness declines with HFT presence, consistent with theoretical models of HFTs' ability to anticipate informed order flow, reducing 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). SAFE Working Paper No. 248. Available at SSRN: https://ssrn.com/abstract=3349653 or http://dx.doi.org/10.2139/ssrn.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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