High-frequency trading and stock price crash risk

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