High frequency trading and extreme price movements

Brogaard, Jonathan;Carrion, Allen;Moyaert, Thibaut;Riordan, Ryan;Sokolov, Konstantin;et.al.
(2018) Journal of Financial Economics — Vol. 128, n° 2, p. 253-265 (2018)

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Authors
  • Brogaard, JonathanUniversity of Washington
    Author
  • Carrion, AllenUniversity of Utah
    Author
  • Moyaert, ThibautUCLouvain
    Author
  • Riordan, RyanQueen's University
    Author
  • Sokolov, KonstantinRochester Institute of Technology and University of Memphis
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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.
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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 (Original work published 2018)