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High-Frequency Trading and Institutional Trading Costs

Author

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  • Marie Chen
  • Corey Garriott

Abstract

Using data on Canadian bond futures, we examine how high-frequency traders (HFTs) interact with institutions building large positions. In contrast to recent findings, we find HFTs in the data act as small-sized liquidity suppliers, and we reject the hypothesis that they engage in back running, a predatory trading strategy. Using a quasi-experiment in November 2011, in which a number of HFTs started trading the bond future, we run a difference-in-differences event study and find more competition among HFTs improves implementation shortfall, effective spreads, and short-term price impacts for institutional trading in Canadian bond futures.

Suggested Citation

  • Marie Chen & Corey Garriott, 2018. "High-Frequency Trading and Institutional Trading Costs," Staff Working Papers 18-8, Bank of Canada.
    • Handle: RePEc:bca:bocawp:18-8
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    References listed on IDEAS

    as
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    Cited by:

    1. Sagade, Satchit & Scharnowski, Stefan & Westheide, Christian, 2022. "Broker colocation and the execution costs of customer and proprietary orders," SAFE Working Paper Series 366, Leibniz Institute for Financial Research SAFE.
    2. Corey Garriot & Ryan Riordan, 2020. "Trading on Long-term Information," Staff Working Papers 20-20, Bank of Canada.
    3. Onur, Esen & Roberts, John S. & Tuzun, Tugkan, 2023. "Trader positions and aggregate portfolio demand," The Journal of Economic Asymmetries, Elsevier, vol. 27(C).
    4. Zheng, Jiayi & Zhu, Yushu, 2023. "Algorithmic trading and block ownership initiation: An information perspective," The British Accounting Review, Elsevier, vol. 55(4).

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    More about this item

    Keywords

    Financial markets; Financial system regulation and policies; Market structure and pricing;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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