High Frequency Trading and Market Stability

Abstract

This paper investigates the relationship between high frequency traders (HFT) and price jumps in the stock market. Using the Nasdaq HFT dataset, we find that HFT liquidity taking activity is lower than normal while HFT liquidity supplying activity is higher. During extreme price jumps HFT liquidity providers accumulate an inventory position in the opposite direction of the jump. HFT liquidity takers take an inventory position in the direction of the jump, but the imbalance is over three times larger for permanent price movements than transitory ones, consistent with HFT impounding new information into prices. The evidence is generally consistent with HFT dampening extreme market events.