Do High-Frequency Traders Bring Fundamental Information into Prices?

• In Event: Algorithmic Trading and Journalism

Abstract

Prior research generates somewhat mixed evidence regarding the role high-frequency trading (HFT) plays in improving price efficiency. Moreover, these studies examine microstructure related effects of HFT activities at very short time intervals, and tie these effects to HFTs’ ability to anticipate short term order flow. However, the extent to which HFT facilitates incorporation of firm-specific fundamental information into prices remains an unanswered research question. We examine HFTs’ role in facilitating assimilation of accounting earnings information into prices. Using a novel dataset that provides identifiers for trades made by HFT and non-HFT, and precise earnings announcement timings, we find that the immediate price response to earnings (the earnings response coefficient, hereafter, ERC) is greater and abnormal price impact of trades is lower for announcements with greater HFT participation after controlling for various determinants of ERC and price impact. Furthermore, greater HFT participation after earnings announcements leads to a reduction in analyst forecast dispersion, an increase in forecast accuracy and speedier revision of forecasts. A series of placebo tests attribute these effects to HFT and not to firm or announcement characteristics. Collectively, our results suggest that HFT participation facilitates assimilation of fundamental accounting information into prices. Our evidence also shows that HFT activities help in information diffusion among information intermediaries, such as financial analysts.

Authors

• Nilabhra Bhattacharya, Southern Methodist University

• Bidisha Chakrabarty, Saint Louis University

• Xu Wang, Saint Louis University