Review of Financial Studies Vol. 25 No. 5 2012
Flow Toxicity and Liquidity in a High-frequency World
Abstract
Order flow is toxic when it adversely selects market makers, who may be unaware they are providing liquidity at a loss. We present a new procedure to estimate flow toxicity based on volume imbalance and trade intensity (the VPIN toxicity metric). VPIN is updated in volume time, making it applicable to the high-frequency world, and it does not require the intermediate estimation of non-observable parameters or the application of numerical methods. It does require trades classified as buys or sells, and we develop a new bulk volume classification procedure that we argue is more useful in high-frequency markets than standard classification procedures. We show that the VPIN metric is a useful indicator of short-term, toxicity-induced volatility.
- DOI
- 10.1093/rfs/hhs053
- Volume
- 25
- Issue
- 5
- Pages
- 1457-1493
- Language
- en
- Sources
- openalex crossref