Abstract
Using the staggered entry of Chi-X in 12 European equity markets as a source of exogenous variation in high frequency trading (HFT), we find that HFT causes significant increases in co-movement in returns and in liquidity. About one-third of the increase in return co-movement is due to faster diffusion of market-wide information. We attribute the remaining two-thirds to correlated trading strategies of HFTs. The increase in liquidity co-movement is consistent with HFT liquidity providers being better able to monitor other stocks and adjust their liquidity provision accordingly. Our findings suggest a channel by which HFT impacts the cost of capital.
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