%0 Journal Article %A Milos Agatonovic %A Vimal Patel %A Chris Sparrow %T Adverse Selection in a High-Frequency Trading Environment %D 2011 %R 10.3905/jot.2012.7.1.018 %J The Journal of Trading %P 18-33 %V 7 %N 1 %X Fear of adverse selection has been cited by buy-side traders as one of the reasons for the decline in block market share, and concerns of adverse selection from executing in dark pools and with high frequency trading firm contras have also been raised. The authors describe and define adverse selection for both block and non-block executions. They define some quantitative metrics to characterize the degree of adverse selection exhibited by Canadian dark executions as well as to capture both the idiosyncratic volatility of the stock being measured and the size of the execution. In the next step, they look at actual executions, both block and non-block, and characterize the level of observed adverse selection. The authors compare their results to a randomized control group for the block trades and compute previously published adverse selection metrics for the non-block execution set. They find statistically significant levels of adverse selection for both block and non-block executions, more traditional adverse selection in the open access dark ATS than in the buy-side-only dark ATS, and a small but statistically significant amount of adverse selection for midsize trades in the open access ATS as a result of resting liquidity in the dark pool interacting with continuous flow passing through. Finally, the authors discuss the implications of the results on algorithmic trading and transaction cost analysis.TOPICS: Statistical methods, exchanges/markets/clearinghouses, equity portfolio management %U https://jot.pm-research.com/content/iijtrade/7/1/18.full.pdf