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.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 1034-1067 |
| Number of pages | 34 |
| Journal | Review of Financial Studies |
| Volume | 32 |
| Issue number | 3 |
| DOIs | |
| State | Published - Mar 1 2019 |
Funding
We thank the Investment Industry Regulatory Organization of Canada (IIROC) for providing us with access to the datausedforthisstudyandVictoriaPinningtonandHelenHogarthofIIROCforansweringquestionsregardingthe data and Canadian market structure details. We also thank Andrew Karolyi (the editor); two anonymous referees; Torben Andersen, Robert Battalio, Oleg Bondarenko, Jonathan Brogaard, Kevin Crotty, Robert Ferstenberg, Mark Grinblatt, Hans Heidle, Sean Kersey, Amy Kwan, Katya Malinova, Pamela Moulton, Ioanid Ros¸u, Gideon Saar, Andriy Shkilko, Brian Weller, Avi Wohl, and Mao Ye; and seminar participants at DePaul University, the European Finance Association Meetings, the FMA Asia/Pacific Conference, the IIROC/Capital Markets Institute High Frequency Trading Forum, the Inquire-Europe Conference, the Multinational Finance Society Conference, the Notre Dame Conference on Current Topics in Financial Regulation, Tel Aviv University, Texas A&M University, University of British Columbia, University of Geneva, University of Melbourne, University of Queensland, University of St. Gallen, the Western Finance Association Meetings, and Wilfrid Laurier University for helpful comments. This work was supported by IIROC. Supplementary data can be found on The Review of Financial Studies Web site. Send correspondence to Dermot Murphy, University of Illinois at Chicago, College of Business, Department of Finance, 601 South Morgan Street, Chicago, IL 60607-7121; telephone: (312) 355-4372. E-mail: [email protected].
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics