The speed and volume of high-frequency trading (HFT) make it harder for other investors to buy or sell when market-moving news is announced, according to a study by the Bank of Canada.
The research, which analyzes trading around US announcements of the Consumer Price Index, the Consumer Confidence Index and other macroeconomic metrics, focuses on the $12 tn US Treasury market.
The researchers find that high-frequency trades increase more than regular trades around important news, lowering liquidity overall. They also reduce the depth of the order book – the number of price levels available – after the announcement of market-moving news.
‘Our results show that HFT activities have a negative effect on liquidity around economic announcements: they widen spreads during the preannouncement period and lower depth on the order book during the post-announcement period,’ the study authors write. ‘High-frequency traders use market orders to [exploit] their information-processing capacity and speed advantage. Their faster orders, which are based on more updated information, pick off orders that react more slowly to information arrival. This generates adverse selection and has a negative impact on market liquidity.’
The study, carried out by George Jiang, Ingrid Lo and Giorgio Valente, also finds that high-frequency trades ‘improve price efficiency’ of the market (the difference between buy and sell orders) at times when major news is not being announced. The overall impact, however, is negative, the researchers say: ‘The magnitude of the public information shocks significantly offsets the improvement in price efficiency.’
