High Frequency Market Making to Large Institutional Trades

Robert A Korajczyk, Dermot Murphy

Research output: Working paper

Abstract

We study market-making high-frequency trader (HFT) dynamics around large institutional trades in Canadian equities markets using order-level data with masked trader identification. Following a regulatory change that negatively affected HFT order activity, we find that bid-ask spreads increased and price impact decreased for institutional trades. The decrease in price impact is strongest for informed institutional traders. During institutional trade executions, HFTs submit more same-direction orders and increase their inventory mean reversion rates. Our evidence indicates that high-frequency trading is associated with lower transaction costs for small, uninformed trades and higher transaction costs for large, informed trades.
Accepted for publication at The Review of Financial Studies.
Original languageEnglish (US)
PublisherSocial Science Research Network (SSRN)
Number of pages28
StateAccepted/In press - Jul 21 2018

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Market making
Traders
Transaction costs
Price impact
Mean reversion
Regulatory change
Bid/ask spread
Market order
Equity markets
High-frequency trading

Cite this

Korajczyk, R. A., & Murphy, D. (Accepted/In press). High Frequency Market Making to Large Institutional Trades. Social Science Research Network (SSRN).
Korajczyk, Robert A ; Murphy, Dermot. / High Frequency Market Making to Large Institutional Trades. Social Science Research Network (SSRN), 2018.
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abstract = "We study market-making high-frequency trader (HFT) dynamics around large institutional trades in Canadian equities markets using order-level data with masked trader identification. Following a regulatory change that negatively affected HFT order activity, we find that bid-ask spreads increased and price impact decreased for institutional trades. The decrease in price impact is strongest for informed institutional traders. During institutional trade executions, HFTs submit more same-direction orders and increase their inventory mean reversion rates. Our evidence indicates that high-frequency trading is associated with lower transaction costs for small, uninformed trades and higher transaction costs for large, informed trades.Accepted for publication at The Review of Financial Studies.",
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Korajczyk, RA & Murphy, D 2018 'High Frequency Market Making to Large Institutional Trades' Social Science Research Network (SSRN).

High Frequency Market Making to Large Institutional Trades. / Korajczyk, Robert A; Murphy, Dermot.

Social Science Research Network (SSRN), 2018.

Research output: Working paper

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T1 - High Frequency Market Making to Large Institutional Trades

AU - Korajczyk, Robert A

AU - Murphy, Dermot

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N2 - We study market-making high-frequency trader (HFT) dynamics around large institutional trades in Canadian equities markets using order-level data with masked trader identification. Following a regulatory change that negatively affected HFT order activity, we find that bid-ask spreads increased and price impact decreased for institutional trades. The decrease in price impact is strongest for informed institutional traders. During institutional trade executions, HFTs submit more same-direction orders and increase their inventory mean reversion rates. Our evidence indicates that high-frequency trading is associated with lower transaction costs for small, uninformed trades and higher transaction costs for large, informed trades.Accepted for publication at The Review of Financial Studies.

AB - We study market-making high-frequency trader (HFT) dynamics around large institutional trades in Canadian equities markets using order-level data with masked trader identification. Following a regulatory change that negatively affected HFT order activity, we find that bid-ask spreads increased and price impact decreased for institutional trades. The decrease in price impact is strongest for informed institutional traders. During institutional trade executions, HFTs submit more same-direction orders and increase their inventory mean reversion rates. Our evidence indicates that high-frequency trading is associated with lower transaction costs for small, uninformed trades and higher transaction costs for large, informed trades.Accepted for publication at The Review of Financial Studies.

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Korajczyk RA, Murphy D. High Frequency Market Making to Large Institutional Trades. Social Science Research Network (SSRN). 2018 Jul 21.