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Abstract Using tick data identifying high-frequency traders (HFTs), this paper studies the trading profits and liquidity provision of HFTs during large price shocks. Previous studies report mixed evidence on whether… Click to show full abstract
Abstract Using tick data identifying high-frequency traders (HFTs), this paper studies the trading profits and liquidity provision of HFTs during large price shocks. Previous studies report mixed evidence on whether HFTs provide or take liquidity in such events. Empirical findings in this paper suggest that relative tick size matters: HFTs provide liquidity when the shock is idiosyncratic and the relative tick size is large, but in this case, they do not earn profits from trading. On average, HFTs can earn profits against non-HFTs because they aggressively take liquidity and trade in the direction of the shocks for stocks of small relative tick sizes.
Journal Title: Finance Research Letters
Year Published: 2021
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