Brogaard, Jonathan and Riordan, Ryan and Shkilko, Andriy and Sokolov, Konstantin, High-Frequency Trading and Extreme Price Movements (November 26, 2014). Available for download at SSRN: http://ssrn.com/abstract=2531122

“This paper examines the relation between high-frequency trading (HFT) and extreme price movements (jumps). Some market observers allege that HFT causes and exacerbates price jumps thus contributing to market instability. Contrary to these allegations, we find that during extreme price movements high-frequency traders act as net liquidity suppliers, while non-high-frequency traders act as net liquidity demanders. Moreover, high-frequency traders are particularly active providing liquidity during price jumps that result in permanent price changes, absorbing the most informed order flow. Our evidence is consistent with HFT performing a stabilizing function in modern markets.”