Are High Frequency Traders Independently Informed?: The Study of the Role of HFTs Around Informational Events

Abstract

Do High Frequency Traders (HFTs) trade on information derived independently or do they expropriate profits from the other informed traders by predicting their trading patterns and trade in front of them? The answer to this question has implication for regulators and other stakeholders. The former is beneficial and the later detrimental because it crowds out other informed traders. Furthermore, if they are independently informed, is that information of long-run(end of the day) nature? Using quarterly earnings announcements on NASDAQ provided HFT data, I find that HFTs are independently informed. Informational independence is for the long-run. Their propensity to take long-run bets is correlated with the level of uncertainty of the earnings surprise; measured by the analyst dispersion, and has cross-sectional variation. I also show evidence that HFTs supply liquidity post announcement. I also do not find any evidence of front running. Using the state space model, I show evidence of the market quality on both the announcement and the post-announcement days, but they provide a significantly larger contribution to market quality on the days of information asymmetry in the large cap stocks.