High-Frequency Trading and Extreme Price Movements
Jonathan Brogaard
Al Carrion
Thibaut Moyaert
Ryan Riordan
Andriy Shkilko
Konstantin Sokolov
March 2015
This paper examines the relation between high-frequency trading (HFT) and extreme price movements (jumps). Some market observers allege that HFT exacerbates or even causes price jumps, thus contributing to market instability. Contrary to these allegations, we find that during extreme price movements high-frequency traders act as net liquidity suppliers, while non-high-frequency traders act as net liquidity demanders. Moreover, high-frequency traders are active liquidity providers during price jumps that result in permanent price changes,absorbing the most informed order flow. Our evidence is consistent with HFT performing a stabilizing function in modern markets.
