How Does HFT Take Advantage of Trend-Volume Signals?

Trading volume is used often to validate trends in stock prices or, alternatively, to indicate trend reversals. However, some evidence has shown that this methodology has become less effective over time, potentially because of the impact of high-frequency traders (HTFs). For this reason, this article investigates the efficacy of using trend and volume to predict future returns on time scales relevant to high-frequency traders themselves. To explore this issue, this study uses NASDAQ limit order book data and follows existing methodologies to find that low volume tends to lead to trend reversal, whereas high volume shows little or no predictive ability. We conclude that high-volume or low-volume periods are different in terms of their informativeness, which demonstrates the interests of HFTs in providing liquidity in the absence of information arrival and trend-inducing orders and not providing liquidity when the probability of adverse selection is high (liquidity evacuation).