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Flow toxicity of high‐frequency trading and its impact on price volatility: Evidence from the KOSPI 200 futures market

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  • Jangkoo Kang
  • Kyung Yoon Kwon
  • Wooyeon Kim

Abstract

We examine the relation between high‐frequency trading, flow toxicity, and short‐term volatility during both normal and stressful periods. Using transaction data for the Korea Composite Stock Price Index 200 (KOSPI 200) futures, we find the Volume‐Synchronized Probability of Informed Trading (VPIN) useful in measuring flow toxicity as it predicts short‐term volatility effectively. We further show that high‐frequency trading is negatively related to VPIN and short‐term volatility during normal times but has a positive association during stressful periods. Finally, we advocate the use of bulk‐volume classification (BVC) by presenting evidence that the initiator identified by BVC trades at more favorable prices than the true trade initiator.

Suggested Citation

  • Jangkoo Kang & Kyung Yoon Kwon & Wooyeon Kim, 2020. "Flow toxicity of high‐frequency trading and its impact on price volatility: Evidence from the KOSPI 200 futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(2), pages 164-191, February.
    • Handle: RePEc:wly:jfutmk:v:40:y:2020:i:2:p:164-191
    DOI: 10.1002/fut.22062
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    Cited by:

    1. Kang, Jongho & Kang, Jangkoo & Kwon, Kyung Yoon, 2022. "Market versus limit orders of speculative high-frequency traders and price discovery," Research in International Business and Finance, Elsevier, vol. 63(C).
    2. Ekinci, Cumhur & Ersan, Oğuz, 2022. "High-frequency trading and market quality: The case of a “slightly exposed” market," International Review of Financial Analysis, Elsevier, vol. 79(C).

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