Information and Inventories in High-Frequency Trading

Johannes Muhle-Karbe and Kevin Webster
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Johannes Muhle-Karbe: ETH Zurich and Swiss Finance Institute
Kevin Webster: Princeton University

No 15-35, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We propose an equilibrium model for the short-term informational advantages crucial in high-frequency trading. In this setting, risk-neutral insiders hold martingale inventories. In contrast, inventory aversion leads to autoregressive positions. These vanish in the continuous-time limit, while still yielding approximately the same returns. This illustrates how high-frequency trading allows to monetize information with very little inventory risk.

Keywords: high frequency trading; information asymmetry; inventory management (search for similar items in EconPapers)
JEL-codes: C61 C68 G11 G14 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2015-09
New Economics Papers: this item is included in nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1535

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