Are Large Traders Harmed by Front-running HFTs?

TL;DR

This paper analyzes how high-frequency traders (HFTs) impact large traders, showing that HFTs always front-run and large traders' profits depend on noise trading and prediction accuracy.

Contribution

It reveals the conditions under which HFTs front-run large traders and how prediction accuracy and noise trading influence large traders' profits.

Findings

HFTs always front-run large traders.

Large traders benefit when noise trading is high and HFT prediction is vague.

Reducing HFT prediction accuracy can decrease large traders' profits.

Abstract

This paper studies the influences of a high-frequency trader (HFT) on a large trader whose future trading is predicted by the former. We conclude that HFT always front-runs and the large trader is benefited when: (1) there is sufficient high-speed noise trading; (2) HFT's prediction is vague enough. Besides, we find surprisingly that (1) making HFT's prediction less accurate might decrease large trader's profit; (2) when there is little high-speed noise trading, although HFT nearly does nothing, the large trader is still hurt.