Abstract
This study examines relations between high frequency trading, order flow toxicity, stock price volatility during normal and high order flow toxicity periods, and the predictability of changes in high frequency traders’ liquidity supply and demand. By employing volume-synchronized probability of informed trading (VPIN), a flow toxicity metric, we find a negative relation between high frequency trading and order flow toxicity. Our results also show that VPIN can be a good predictor of high frequency traders’ liquidity supply and demand changes. Finally, we find that high frequency traders’ impact on stock price variance is not uniform and change with order flow toxicity levels and stock volume.
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