Withdrawal of High-Frequency Traders and Intraday ETF Volatility during the COVID-19 Crisis

Does high-frequency trade increase or decrease volatility in financial markets during crises? We introduce a novel intraday volatility measure for ETFs, and find that during the COVID-19 crisis period, the withdrawal of high-frequency trade from large stock ETFs increases intraday ETF volatility net of the fundamental shock from COVID itself by over 30%. The speed of arbitrage activities slows down during the COVID-19 period as high-frequency traders reduce the intensity of their trading. While high-frequency traders may serve as de facto market makers during normal times, they withdraw from the market during a crisis, precisely when they are needed most.