Price discovery and the cross-section of high-frequency trading

• We analyze how contribution to price discovery varies in the cross-section of HFTs.
• HFTs collectively account for 14% of the trade-related price discovery.
• Of this, 10% is accounted for by aggressive HFTs.
• Aggressive HFTs also trade in the direction of future price changes.
• HFT strategies that rely on aggressive trades have limited scalability.

We quantify the price discovery contributions of high-frequency traders (HFTs) in the United Kingdom equity market and examine how it varies in their cross-section. For this, we group individual HFTs according to their liquidity taking/making activity. HFTs contribute about 14% of all trade-induced information, with aggressive HFTs accounting for two-thirds of this contribution. This suggests that HFTs who pursue strategies that require the use of aggressive trades are most informed, as opposed to passive HFTs who more likely act as market-makers. However, information shares decline with the amount of aggressive volume, suggesting that these trading strategies are not scalable.