Thesis (Ph. D.)--University of Rochester. Simon School of Business, 2019.
I examine how high-frequency traders (HFTs) adjust their trading behavior based on market conditions, as well as their consequent market impact. I represent HFTs' trading behavior into two main categories of trading styles: market-making, whereby HFTs perform as "liquidity providers" in the Kyle (1985) model, and active-trading, whereby HFTs actively perform as "informed traders" in the Kyle framework. Analyzing HFTs' trading styles led to four novel findings. First, HFTs' market-making activities are negatively affected by both expected and unexpected stock volatility components. Second, during news events, HFTs select their trading styles across different news topics, based on the informativeness level of each topic. Third, due to the immediate active-trading strategies upon news events, HFTs facilitate price discovery only within around 100 seconds after news events. Lastly, the SEC's short-sale ban act in 2008 effectively restricted HFTs' active trading styles, but also excluded HFTs from improving the market price efficiency. Above all, understanding HFTs' market impact from their trading behavior, rather than mere trading speed, is essential to fully understanding their roles in the modern equities markets.
