High frequency trading, liquidity, and execution cost

Edward Sun, Timm Kruse and Min-Teh Yu ()

Annals of Operations Research, 2014, vol. 223, issue 1, 403-432

Abstract: We build a model under the framework of discrete optimization to explain how high frequency trading (HFT) can be applied to supply liquidity and reduce execution cost. We derive the analytical properties of our model in finding the optimal solution to minimize the overall execution cost of HFT. We show that the execution cost can be reduced after increasing trading frequency (i.e., the higher the trading frequency, the lower the execution cost) with a simulation study. In addition, we conduct an empirical investigation with tick level data from US equity market through January 2008 to October 2010 to verify our conclusion drawn from the simulation study. Based on the simulation and empirical results we collected, we show that the HFT can reduce the execution cost when supplying liquidity. Copyright Springer Science+Business Media New York 2014

Keywords: Discrete optimization; High frequency trading; Liquidity; Price impact; Optimal execution (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (11)

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DOI: 10.1007/s10479-013-1382-8

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