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Are high–frequency traders informed?

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  • Anagnostidis, Panagiotis
  • Fontaine, Patrice
  • Varsakelis, Christos

Abstract

Are high–frequency traders (HFTs) informed? To address this question, we examine HFTs' activity in the call auction environment, where speed-related trading is limited and signal processing capacity becomes more relevant. To model the call market, we consider the Kyle (1989) rational expectations framework for strategic trading. The test we propose for detecting informed HFTs in this market assesses potential deviations of the informativeness of HFTs' aggregate (net) demand, from the informativeness of the aggregate demand submitted by the rest of the traders. Data from the Euronext Paris preopening phase indicate that informed HFTs are present in the market just before the opening. Our results provide useful guidance for the assessment of the influence of HFTs’ quotes on price quality, an important issue for market regulators and policy makers.

Suggested Citation

  • Anagnostidis, Panagiotis & Fontaine, Patrice & Varsakelis, Christos, 2020. "Are high–frequency traders informed?," Economic Modelling, Elsevier, vol. 93(C), pages 365-383.
    • Handle: RePEc:eee:ecmode:v:93:y:2020:i:c:p:365-383
    DOI: 10.1016/j.econmod.2020.08.013
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    More about this item

    Keywords

    High–frequency trading; Call auction; Rational expectations; Price efficiency;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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