Fast and slow optimal trading with exogenous information

Rama Cont (), Alessandro Micheli () and Eyal Neuman ()
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Rama Cont: University of Oxford
Alessandro Micheli: Imperial College London
Eyal Neuman: Imperial College London

Finance and Stochastics, 2025, vol. 29, issue 2, No 7, 553-607

Abstract: Abstract We model the interaction between an investor executing trades at low frequency and a high-frequency trader as a multiperiod stochastic Stackelberg game. The high-frequency trader exploits price information more frequently and is subject to periodic inventory constraints. We are able to explicitly compute the equilibrium strategies, in two steps. We first derive the optimal strategy of the high-frequency trader given any strategy adopted by the investor. Then we solve the problem of the investor given the optimal strategy of the high-frequency trader, in terms of the resolvent of a Fredholm integral equation. Our results show that the high-frequency trader adopts a predatory strategy whenever the value of the trading signal is high, and follows a cooperative strategy otherwise. We also show that there is a net gain in performance for the investor from taking into account the order flow of the high-frequency trader. A U-shaped intraday pattern in trading volume is shown to arise endogenously as a result of the strategic behaviour of the agents.

Keywords: Market microstructure; High-frequency trading; Optimal stochastic control; Stochastic games; Price impact; Fredholm integral equations; Trading signals; Stackelberg equilibrium; 45B05; 49N70; 49N90; 91A65; 93E20; 60H30 (search for similar items in EconPapers)
JEL-codes: C02 C61 C73 G11 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s00780-025-00560-w

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