The Pacifying Spike: High-Frequency Trading and Its Mitigating Influence on Volatility.

This article studies book-level data of the S&P 500 ETF to explore the link between high-frequency trading (HFT) and realized midpoint volatility. Using limit order cancelations and one-minute bars to measure activity, we define periods of high intensity of HFT activity ("high spikes") and low intensity of HFT activity ("low spikes"). We find that during the high spikes, HFT pacifies volatility. In low spikes, where HFTs are very inactive, we do not observe significant changes in volatility. Thus, we argue that HFT's rapid limit order add and cancel behavior guides price discovery. We also find that the level of HFT activity is significantly related to the volume measured on the top level of the book (negatively) and spread (positively). The latter is likely an artifact of using inherently spread-widening cancelations as the measure. [ABSTRACT FROM AUTHOR]