High‐Frequency Trading around Large Institutional Orders

Abstract

Liquidity suppliers lean against the wind. We analyze whether high‐frequency traders (HFTs) lean against large institutional orders that execute through a series of child orders. The alternative is HFTs trading with the wind, that is, in the same direction. We find that HFTs initially lean against these orders but eventually change direction and take positions in the same direction for the most informed institutional orders. Our empirical findings are consistent with investors trading strategically on their information. When deciding trade intensity, they seem to trade off higher speculative profits against higher risk of being detected and preyed on by HFTs.

Brokers and Order Flow Leakage: Evidence from Fire Sales

“…The latter behavior increases trading costs for the institution, as predicted by Yang and Zhu (). Similar to van Kervel and Menkveld (), we study the interplay among institutional investors and we detect trading behavior by other investors that is harmful to the initiator of a large order. Our evidence differs from and complements their results along several dimensions.…”

Glued to the TV: Distracted Noise Traders and Stock Market Liquidity

“…The distraction effect on liquidity may simultaneously be dampened to the extent that high‐frequency liquidity providers are quick to adapt to incoming informed orders, thus alleviating adverse selection. Consistent with this conjecture, Van Kervel and Menkveld () document that high‐frequency traders rapidly switch from supplying liquidity to front‐running when trading alongside informed institutional orders—a practice the authors call “with‐wind trading.”…”

The impact of latency sensitive trading on high frequency arbitrage opportunities

“…However, Jain and McInish (2012) find that HFT increases tailrisk in Japan, while Boehmer et al (2014) in their global study report that HFT increases short-term volatility, leading to further negative externalities in the market, as modelled by Biais et al (2012). Brogaard et al (2014b) find following infrastructure upgrades on the LSE, the associated increase in HFT activity does not affect institutional trader costs, while Van Kervel and Menkveld (2016) document that institutional transaction costs increase (decrease) when HFTs trade in the same (opposite) direction as institutional investors who execute a package of trades through order-splitting strategies on the Nasdaq OMX Sweden. Conversely, Toth et al (2015) find order splitting does not appear to change with the rise of algorithmic trading on the LSE.…”