Chapter 15 - Do High Frequency Traders Care about Earnings Announcements? An Analysis of Trading Activity before, during, and after Regular Trading Hours

Abstract

We examine trading activity (1) before regular trading hours (RTHs), (2) during RTHs and (3) after RTHs on earnings announcement days and nonannouncement days for high frequency traders (HFTs) and non-HFTs. First, we show that, although high frequency trading firms initiate more trades on earnings announcement days than on nonannouncement days, the proportion of volume that these trades account for is either constant or marginally lower. High frequency trading firms initiate trades representing a higher proportion of volume during RTHs than during before market or after-market hours. Second, we provide evidence that trades initiated by non-HFTs generally contribute more to price discovery than trades initiated by HFTs. For before market open earnings announcements, trades initiated by non-HFTs contribute more to price discovery than HFTs, for both NYSE- and NASDAQ-listed stocks. However, we find that trades initiated by HFTs contribute heavily to price discovery for NYSE-listed stocks during the RTHs following an after-hours earnings announcement. Third, we show that firm size, trading volume, and a stock's listing exchange influence the price discovery of trades between non-HFTs.