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

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.