Study Considers Effect of High-Frequency Trading on Large Institutional Orders

A recent study (the "Study") by VU University of Amsterdam professors Vincent van Kervel and Albert J. Menkveld explored how high-frequency trading firms ("HFTs") interact with large institutional orders. The Study examined a sample of order executions by four large institutional investors for Swedish stocks in 2011-2013. It found that, although HFTs trade initially in the opposite direction of large institutional investors, if an institutional investor takes longer than a few hours to execute its order, the HFTs will turn around and trade in the same direction as the large institutional investor.

According to the Study, an institutional investor's trading costs are lower initially while HFTs are trading against order flow. When the HFTs turn around and trade in the same direction, an institutional investor's trading costs will be disproportionately higher. The Study speculated that the HFTs are more likely to "eventually feel the imbalance caused by [the institutional investor] . . . and trade out of their positions as they understand that leaning against such [an] order as a market maker requires a long-lasting inventory position [which HFTs that prefer to be flat at the end of the day generally do not have.]"

The Study concluded that its results were inconsistent with HFTs' "front-running" large institutional orders.

See: High-Frequency Trading around Large Institutional Orders.