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

Jangkoo Kang, Kyung Yoon Kwon, Wooyeon Kim

Research output: Contribution to journalArticle

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.
Original languageEnglish
JournalJournal of Futures Markets
Early online date10 Oct 2019
DOIs
Publication statusE-pub ahead of print - 10 Oct 2019

Fingerprint

High-frequency trading
Price volatility
Toxicity
Futures markets
Probability of informed trading
Transaction data

Keywords

  • high frequency trading
  • order flow toxicity
  • short-term price volatility
  • VPIN

Cite this

@article{18a521f978e94a6185277f95db11276b,
title = "Flow toxicity of high frequency trading and its impact on price volatility: evidence from the KOSPI 200 futures market",
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.",
keywords = "high frequency trading, order flow toxicity, short-term price volatility, VPIN",
author = "Jangkoo Kang and Kwon, {Kyung Yoon} and Wooyeon Kim",
year = "2019",
month = "10",
day = "10",
doi = "10.1002/fut.22062",
language = "English",
journal = "Journal of Futures Markets",
issn = "0270-7314",

}

TY - JOUR

T1 - Flow toxicity of high frequency trading and its impact on price volatility

T2 - evidence from the KOSPI 200 futures market

AU - Kang, Jangkoo

AU - Kwon, Kyung Yoon

AU - Kim, Wooyeon

PY - 2019/10/10

Y1 - 2019/10/10

N2 - 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.

AB - 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.

KW - high frequency trading

KW - order flow toxicity

KW - short-term price volatility

KW - VPIN

UR - https://onlinelibrary.wiley.com/journal/10969934

U2 - 10.1002/fut.22062

DO - 10.1002/fut.22062

M3 - Article

JO - Journal of Futures Markets

JF - Journal of Futures Markets

SN - 0270-7314

ER -