Abstract
Using the SEC’s Tick Size Pilot experiment, we examine the causal relation between the intensity of trades by high frequency traders (HFTs) and analyst research production. We propose that HFTs pre-empt other investors’ trades, which lowers non-HFTs’ profitability of trades on analyst reports and, as a result, non-HFTs demand for analyst investment advice. Consistently, stocks where a large proportion of trades is HFT driven have (1) fewer profitable trades on analyst reports that non-HFTs can exploit and (2) fewer analyst research reports and lower analyst coverage. The negative effect HFTs have on analyst research production is moderated by institutional investors who demand analyst research for the monitoring purpose. Overall, our results suggest that a consequence of high frequency trading is lower analyst research production.
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