Abstract
We utilize a unique data set that provides all orders and trades, with (masked) trader identity known, for all equities traded on Canadian exchanges. We identify and characterize designated market makers (DMMs) and high frequency traders that act as market makers (HFTs). We also identify large institutional trade packages and characterize how HFTs and DMMs provide liquidity to these trades. Both HFTs and DMMs provide liquidity to large institutional trades, with HFTs providing substantially more. In high volume stocks, HFTs reduce liquidity provision for “stressful” trades by 42 percent while DMM liquidity provision remains mostly unchanged. Implementation shortfall (price) of large trades is significantly affected by HFT (and to a lesser extent DMM) choice of liquidity provision during the trade. ∗We thank the Investment Industry Regulatory Organization of Canada (IIROC) for providing us with access to the data used for this study and Victoria Pinnington and Helen Hogarth of IIROC for answering our innumerable questions regarding the data and Canadian market structure details. We also thank Torben Andersen, Oleg Bondarenko, Kevin Crotty, Hanh Le, and Brian Weller for useful comments on the paper. All errors are our own. †Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL, 60208-2001; tel: (847) 491-8336; e-mail: r-korajczyk@kellogg.northwestern.edu. ‡University of Illinois at Chicago, College of Business, Department of Finance, 601 South Morgan Street, Chicago, IL, 60607-7121; tel: (312) 355-4372; e-mail: murphyd@uic.edu.
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