Withdrawal of High-Frequency Traders and Intraday ETF Volatility during the COVID-19 Crisis

42 Pages Posted: 27 Dec 2021

See all articles by Rajesh K. Aggarwal

Rajesh K. Aggarwal

Northeastern University

Da Huang

University of Utah - David Eccles School of Business

Date Written: December 22, 2021

Abstract

Does high-frequency trade increase or decrease volatility in financial markets during crises? We introduce a novel intraday volatility measure for ETFs, and find that during the COVID-19 crisis period, the withdrawal of high-frequency trade from large stock ETFs increases intraday ETF volatility net of the fundamental shock from COVID itself by over 30%. The speed of arbitrage activities slows down during the COVID-19 period as high-frequency traders reduce the intensity of their trading. While high-frequency traders may serve as de facto market makers during normal times, they withdraw from the market during a crisis, precisely when they are needed most.

Keywords: Volatility, high-frequency trading, COVID-19

JEL Classification: G10, G12, G14

Suggested Citation

Aggarwal, Rajesh K. and Huang, Da, Withdrawal of High-Frequency Traders and Intraday ETF Volatility during the COVID-19 Crisis (December 22, 2021). Available at SSRN: https://ssrn.com/abstract=3992113 or http://dx.doi.org/10.2139/ssrn.3992113

Rajesh K. Aggarwal

Northeastern University ( email )

413 Hayden Hall
360 Huntington Avenue
Boston, MA 02115
United States

Da Huang (Contact Author)

University of Utah - David Eccles School of Business ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

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