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

Kang, Jangkoo and Kwon, Kyung Yoon and Kim, Wooyeon (2019) Flow toxicity of high frequency trading and its impact on price volatility : evidence from the KOSPI 200 futures market. Journal of Futures Markets. ISSN 0270-7314

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    Abstract

    We examine the relations among high frequency trading, flow toxicity, and short-term volatility during both normal and stressful times. Using transaction data from the KOSPI 200 futures market, we find that the volume-synchronized probability of informed trading (VPIN) well measures flow toxicity in that it strongly predicts short-term volatility. We further show that high frequency trading is negatively related to VPIN and short-term volatility in normal times, but turns to be positively related in stressful times. Finally, we advocate to use bulk volume classification (BVC) by presenting evidence that the initiator identified by BVC trades at more favorable prices than the true trade initiator.