Abstract
This study examines relations between high frequency trading, order flow toxicity, stock price volatility during normal and high order flow toxicity periods, and the predictability of changes in high frequency traders’ liquidity supply and demand. By employing volume-synchronized probability of informed trading (VPIN), a flow toxicity metric, we find a negative relation between high frequency trading and order flow toxicity. Our results also show that VPIN can be a good predictor of high frequency traders’ liquidity supply and demand changes. Finally, we find that high frequency traders’ impact on stock price variance is not uniform and change with order flow toxicity levels and stock volume.
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Notes
The NASDAQ high frequency dataset includes 120 stocks.
Participation definitions are similar to those of Brogaard (2010).
We winsorize “price” at 0.01 and 99.9 percentiles to eliminate the impact of any outliers as in Hendershott et al. (2011).
We discuss the findings of Kolmogorov-Smirnov test, but do not report the results. The findings are available upon request.
Exceptions are: after 1 window, which is significant at 10 % level, and after 5 window, which is statistically insignificant.
Our approach is similar to that of Andersen and Bondarenko (2014a–b).
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Van Ness, B.F., Van Ness, R.A. & Yildiz, S. The role of HFTs in order flow toxicity and stock price variance, and predicting changes in HFTs’ liquidity provisions. J Econ Finan 41, 739–762 (2017). https://doi.org/10.1007/s12197-016-9374-6
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DOI: https://doi.org/10.1007/s12197-016-9374-6