High frequency trading and extreme price movements

Authors

Jonathan Brogaard, Foster School of Business
Allen Carrion, David Eccles School of BusinessFollow
Thibaut Moyaert, Louvain School of Management
Ryan Riordan, The Stephen J. R. Smith School of Business
Andriy Shkilko, Lazaridis School of Business and Economics
Konstantin Sokolov, Saunders College of Business

Abstract

Are endogenous liquidity providers (ELPs) reliable in times of market stress? We examine the activity of a common ELP type—high frequency traders (HFTs)—around extreme price movements (EPMs). We find that on average HFTs provide liquidity during EPMs by absorbing imbalances created by non-high frequency traders (nHFTs). Yet HFT liquidity provision is limited to EPMs in single stocks. When several stocks experience simultaneous EPMs, HFT liquidity demand dominates their supply. There is little evidence of HFTs causing EPMs.

Publication Title

Journal of Financial Economics

Recommended Citation

Brogaard, J., Carrion, A., Moyaert, T., Riordan, R., Shkilko, A., & Sokolov, K. (2018). High frequency trading and extreme price movements. Journal of Financial Economics, 128 (2), 253-265. https://doi.org/10.1016/j.jfineco.2018.02.002