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High frequency trading and price discovery


  • Brogaard, Jonathan
  • Hendershott, Terrence
  • Riordan, Ryan


We examine empirically the role of high-frequency traders (HFTs) in price discovery and price efficiency. Based on our methodology, we find overall that HFTs facilitate price efficiency by trading in the direction of permanent price changes and in the opposite direction of transitory pricing errors, both on average and on the highest volatility days. This is done through their liquidity demanding orders. In contrast, HFTs' liquidity supplying orders are adversely selected. The direction of buying and selling by HFTs predicts price changes over short horizons measured in seconds. The direction of HFTs' trading is correlated with public information, such as macro news announcements, market-wide price movements, and limit order book imbalances. JEL Classification: G12

Suggested Citation

  • Brogaard, Jonathan & Hendershott, Terrence & Riordan, Ryan, 2013. "High frequency trading and price discovery," Working Paper Series 1602, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20131602

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    References listed on IDEAS

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    Cited by:

    1. Aitken, Michael & Cumming, Douglas & Zhan, Feng, 2015. "High frequency trading and end-of-day price dislocation," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 330-349.
    2. repec:kap:jbuset:v:147:y:2018:i:1:d:10.1007_s10551-015-2964-y is not listed on IDEAS
    3. Marouane Anane & Frédéric Abergel, 2014. "Optimal high frequency strategy in an omniscient order book," Working Papers hal-01006401, HAL.
    4. Carrion, Allen, 2013. "Very fast money: High-frequency trading on the NASDAQ," Journal of Financial Markets, Elsevier, vol. 16(4), pages 680-711.
    5. Manahov, Viktor, 2016. "A note on the relationship between high-frequency trading and latency arbitrage," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 281-296.
    6. J. Dugast & T. Foucault, 2014. "False News, Informational Efficiency, and Price Reversals," Working papers 513, Banque de France.
    7. Jonathan Brogaard & Corey Garriott & Anna Pomeranets, 2014. "High-Frequency Trading Competition," Staff Working Papers 14-19, Bank of Canada.
    8. repec:wsi:ijtafx:v:17:y:2014:i:05:n:s0219024914500344 is not listed on IDEAS
    9. Thierry Foucault & Roman Kozhan & Wing Wah Tham, 2017. "Toxic Arbitrage," Review of Financial Studies, Society for Financial Studies, vol. 30(4), pages 1053-1094.
    10. So, Eric C. & Wang, Sean, 2014. "News-driven return reversals: Liquidity provision ahead of earnings announcements," Journal of Financial Economics, Elsevier, vol. 114(1), pages 20-35.
    11. Danny Lo, 2015. "Essays in Market Microstructure and Investor Trading," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 22.
    12. Rene Carmona & Kevin Webster, 2017. "The microstructure of high frequency markets," Papers 1709.02015,
    13. Fry, John & Serbera, Jean-Philippe, 2017. "Modelling and mitigation of Flash Crashes," MPRA Paper 82457, University Library of Munich, Germany.
    14. Kwan, Amy & Masulis, Ronald & McInish, Thomas H., 2015. "Trading rules, competition for order flow and market fragmentation," Journal of Financial Economics, Elsevier, vol. 115(2), pages 330-348.
    15. O’Hara, Maureen, 2015. "High frequency market microstructure," Journal of Financial Economics, Elsevier, vol. 116(2), pages 257-270.
    16. Buti, Sabrina & Consonni, Francesco & Rindi, Barbara & Werner, Ingrid M., 2013. "Sub-Penny and Queue-Jumping," Working Paper Series 2013-18, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    17. Rene Carmona & Kevin Webster, 2013. "The Self-Financing Equation in High Frequency Markets," Papers 1312.2302,

    More about this item


    high frequency trading; price discovery; price formation; pricing errors;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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