Abstract
AbstrastWe examine the relation between high‐frequency trading, flow toxicity, and short‐term volatility during both normal and stressful periods. Using transaction data for the Korea Composite Stock Price Index 200 (KOSPI 200) futures, we find the Volume‐Synchronized Probability of Informed Trading (VPIN) useful in measuring flow toxicity as it predicts short‐term volatility effectively. We further show that high‐frequency trading is negatively related to VPIN and short‐term volatility during normal times but has a positive association during stressful periods. Finally, we advocate the use of bulk‐volume classification (BVC) by presenting evidence that the initiator identified by BVC trades at more favorable prices than the true trade initiator.
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