Abstract
Using unique transactions data for individual high-frequency trading (HFT) firms in the U.K. equity market, we examine the extent to which the trading activity of individual HFT firms is correlated with each other and the impact on price efficiency. We find that HFT order flow, net positions, and total volume exhibit significantly higher commonality than those of a comparison group of investment banks. However, intraday HFT order flow commonality is associated with a permanent price impact, suggesting that commonality in HFT activity is information based and so does not generally contribute to undue price pressure and price dislocations.
Highlights
High-frequency trading, where automated computer traders interact at lightningfast speed with electronic trading platforms, has become an important feature of many modern markets
Using a unique data set of the transactions of individual high-frequency traders (HFTs), we examine the interactions between different high-frequency trading (HFT) and the impact of such interactions on price discovery
The results for net positions, in particular, highlight that HFT firms have a tendency to all trade in the same direction at the time, whereas investment banks instead tend to trade more disparately and absorb each others’ changes in inventory
Summary
High-frequency trading, where automated computer traders interact at lightningfast speed with electronic trading platforms, has become an important feature of many modern markets. The observed commonality is the result of HFT firms trading on common sources of information To test these two hypotheses, we construct a high-frequency metric of HFT and IB order flow correlation and use it as an explanatory variable in a price impact regression. Correlation in trading activity among HFTs might at least partly, be driven by correlations in their private information signals This result expands upon previous findings that HFTs, on average, tend to act as informed traders and trade in the direction of permanent price changes (e.g., Carrion, 2013, and Brogaard, Hendershott, and Riordan, 2014).
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