High Frequency Market Making to Large Institutional Trades

We study high-frequency trader (HFT) dynamics around large institutional trades in Canadian equities markets using order level data with masked trader identi_cation. Using a regulatory change that negatively a_ected HFT order submission activity, we provide causal evidence showing that increased HFT activity leads to higher institutional execution costs. This relationship is more pronounced for orders originating from informed institutional traders. We show that HFTs compete with institutional orders. Inventory management accounts for two-thirds of this competition, while backrunning the institutional order accounts for the remaining one-third. HFTs back-run orders using institutional trade predictors that include past price movements, trade imbalances, and limit order imbalances.