 The optimal bid-ask price strategies of high-frequency trading and the effect on market liquidityHaijun Yang, Hengshun Ge and Ying Luo Research in International Business and Finance, 2020, vol. 53, issue C Abstract: We propose a model for determining the optimal bid-ask spread strategy by a high-frequency trader (HFT) who has an informational advantage and receives information about the true value of a security. We employ an information cost function that includes volatility and the volume of the asset. Subsequently, we characterize the optimal bid-ask price strategies and obtain a stable bid-ask spread. We assume that orders submitted by low-frequency traders (LFTs) and news events arrive at the market with Poisson processes. Additionally, our model supports the trading of the two-sided quote in one period. We find that more LFTs and a higher exchange latency both hurt market liquidity. The HFT prefers to choose a two-sided quote to gain more profits while cautiously chooses a one-sided quote during times of high volatility. The model generates some testable implications with supporting empirical evidence from the NASDAQ-OMX Nordic Market. Keywords: High-frequency trading; Optimal strategies; Stable bid-ask spread; Market liquidity (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:53:y:2020:i:c:s0275531919309754 DOI: 10.1016/j.ribaf.2020.101194 Access Statistics for this article Research in International Business and Finance is currently edited by T. Lagoarde Segot More articles in Research in International Business and Finance from Elsevier |
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