Flow toxicity of high frequency trading and its impact on price volatility : evidence from the KOSPI 200 futures market

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Kang, Jangkoo and Kwon, Kyung Yoon and Kim, Wooyeon (2020) Flow toxicity of high frequency trading and its impact on price volatility : evidence from the KOSPI 200 futures market. Journal of Futures Markets, 40 (2). pp. 164-191. ISSN 0270-7314 (https://doi.org/10.1002/fut.22062)

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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.

ORCID iDs

Kang, Jangkoo, Kwon, Kyung Yoon ORCID logoORCID: https://orcid.org/0000-0002-6212-8187 and Kim, Wooyeon;
CORE (COnnecting REpositories)