Combining data on high frequency trading (HFT) activities of a randomly selected sample of 120 stocks and data on institutional trades, I find that HFT increases the trading costs of traditional institutional investors. One standard deviation increase in the intensity of HFT activities increases institutional execution shortfall costs by a third. Further analysis suggests that HFT represents as an ephemeral and extra-expensive source of liquidity provision when demand and supply among institutional investors are imbalanced, and that the impact on institutional trading costs is most pronounced when high frequency (HF) traders engage in directional strategies (e.g., front-running).I perform various analyses to rule out an alternative explanation that HF traders are attracted to stocks that have high trading costs. First, HFT is most active on liquid stocks. Second, the results are robust to the controls for stable stock liquidity characteristics and events that might jointly affect HFT and trading costs. Third, an analysis of the HFT behavior around the temporary short selling ban in September 2008 highlights the opportunistic nature of liquidity provision by HF traders. Finally, Granger causality tests show that intensive HFT activity significantly contributes to institutional trading costs, but not vice versa.

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We provide novel evidence on the role of ambiguity aversion in determining the response of mutual fund investors to fund performance. We present a model of ambiguity averse investors who receive multiple performance-based signals of uncertain precision about manager skill. A key implication of the model is that investors place a greater weight on the worst signal. We find strong empirical support for this prediction in the form of heightened sensitivity of investor fund flows to the worst performance measure across multiple horizons. This effect is particularly pronounced for retail funds in contrast to institutional funds.

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