High-frequency trading and stock price crash risk

55 Pages Posted: 27 Jan 2024

See all articles by Emmanouil G. Pyrgiotakis

Emmanouil G. Pyrgiotakis

University of Essex - Essex Business School

Thanos Verousis

Vlerick Business School

Mengyu Zhang

University of Sheffield

Date Written: January 24, 2024

Abstract

We investigate the effect of High Frequency Trading (HFT) on stock price crash risk by exploiting the staggered introduction of HFT across international exchanges. Using a difference-in-differences analysis, we find that stock price crash risk increases by more than 80% following the HFT presence. Notably, the positive HFT effect on crash risk is more pronounced on larger firms. Our results survive a battery of robustness tests, including propensity score matching and placebo tests. Channel analysis indicates that HFT increases liquidity and makes stock prices more noisy and less informative, which intensifies investor disagreement and encourages managerial bad news hoarding. Finally, the HFT effect is moderated in countries with well-developed derivatives markets, for firms with higher analyst coverage and in collectivist or religious societies.

Keywords: High-Frequency Trading; stock price crash risk; liquidity; information

JEL Classification: G13, G14, G17

Suggested Citation

Pyrgiotakis, Emmanouil G. and Verousis, Thanos and Zhang, Mengyu, High-frequency trading and stock price crash risk (January 24, 2024). Available at SSRN: https://ssrn.com/abstract=4705469 or http://dx.doi.org/10.2139/ssrn.4705469

Emmanouil G. Pyrgiotakis (Contact Author)

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Thanos Verousis

Vlerick Business School ( email )

Library
REEP 1
Gent, BE-9000
Belgium

Mengyu Zhang

University of Sheffield ( email )

17 Mappin Street
Sheffield, Sheffield S1 4DT
United Kingdom

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