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High-Frequency Trading and Price Informativeness

Author

Listed:
  • Jasmin Gider
  • Simon N. M. Schmickler
  • Christian Westheide

Abstract

We study how stock price informativeness changes with the presence of high-frequency trading (HFT). Our estimate is based on the staggered start of HFT participation in a panel of international exchanges. With HFT presence market prices are a less reliable predictor of future cash flows and investment, even more so for longer horizons. Further, idiosyncratic volatility decreases, mutual funds trade less actively and their holdings deviate less from the market-capitalization weighted portfolio. These findings suggest that price informativeness declines with HFT presence, consistent with theoretical models of HFTs' ability to anticipate informed order flow, reducing incentives to acquire fundamental information.

Suggested Citation

  • Jasmin Gider & Simon N. M. Schmickler & Christian Westheide, 2021. "High-Frequency Trading and Price Informativeness," CRC TR 224 Discussion Paper Series crctr224_2021_257, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2021_257
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp257
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    More about this item

    Keywords

    High-Frequency Trading; Price Efficiency; Information Acquisition; Information Production;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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