High-Frequency Market Making to Large Institutional Trades

Abstract

We study market-making high-frequency trader (HFT) dynamics around large institutional trades in Canadian equities markets using order-level data with masked trader identification. Following a regulatory change that negatively affected HFT order activity, we find that bid-ask spreads increased and price impact decreased for institutional trades. The decrease in price impact is strongest for informed institutional traders. During institutional trade executions, HFTs submit more same-direction orders and increase their inventory mean reversion rates. Our evidence indicates that high-frequency trading is associated with lower transaction costs for small, uninformed trades and higher transaction costs for large, informed trades. Received May 24, 2016; editorial decision June 21, 2018 by Editor Andrew Karolyi. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online.