Flow toxicity of high-frequency trading and its impact on price volatility: Evidence from the KOSPI 200 futures market |
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| Authors: | Jangkoo Kang Kyung Yoon Kwon Wooyeon Kim |
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| Institution: | 1. Graduate School of Finance and Accounting, College of Business, Korea Advanced Institute of Science and Technology, Seoul, Korea;2. Department of Accounting and Finance, Strathclyde Business School, University of Strathclyde, Glasgow, United Kingdom;3. College of Business, Korea Advanced Institute of Science and Technology, Seoul, Korea |
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| Abstract: | We examine the relation between high-frequency trading, flow toxicity, and short-term volatility during both normal and stressful periods. Using transaction data for the Korea Composite Stock Price Index 200 (KOSPI 200) futures, we find the Volume-Synchronized Probability of Informed Trading (VPIN) useful in measuring flow toxicity as it predicts short-term volatility effectively. We further show that high-frequency trading is negatively related to VPIN and short-term volatility during normal times but has a positive association during stressful periods. Finally, we advocate the use of bulk-volume classification (BVC) by presenting evidence that the initiator identified by BVC trades at more favorable prices than the true trade initiator. |
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| Keywords: | high-frequency trading order flow toxicity short-term price volatility volume-synchronized probability of informed trading |
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