Investment in high-frequency trading technology: A real options approach

Laura Delaney

European Journal of Operational Research, 2018, vol. 270, issue 1, 375-385

Abstract: This paper derives an optimal timing strategy for a regular slow trader considering investing in a high-frequency trading (HFT) technology. The market is fragmented, and slow traders compete with fast traders for trade execution. Given this optimal timing rule, I then characterise the equilibrium level of fast trading in the market as well as the welfare-maximising socially optimal level. I show that there is always a unique cost of investment such that the equilibrium level of fast trading and the socially optimal level coincide. Finally I discuss potential policy responses to addressing equilibrium and social optimality misalignment in HFT.

Keywords: Finance; High frequency trading; Fragmented markets; Real options (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:270:y:2018:i:1:p:375-385

DOI: 10.1016/j.ejor.2018.03.025

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