High-Frequency Trading and Price Discovery: The Role of Strategic Runs

High-Frequency Trading and Price Discovery: The Role of Strategic Runs

Strategic runs are an outcome of high-frequency trading strategies that lead to an alternating cycle of order submissions and cancellations within a short time interval. We provide evidence that events in the limit order book linked to strategic runs have less permanent price impact and contribute less to price discovery than other events of the same aggressiveness that are not part of a strategic run. An events contribution to price discovery becomes significantly reduced as soon as other market participants can recognize that it belongs to a strategic run. In sum, our findings indicate that these activities of high-frequency traders do not enhance price discovery but rather dilute it by triggering a substantial number of limit order book events that contain limited informational value.