Abnormal Profit Opportunities and the Informational Advantage of High Frequency Trading

Robert Jarrow () and Hao Li ()
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Hao Li: Samuel Curtis Johnson Graduate School of Management, Cornell University, Ithaca, N.Y. 14853, USA

Quarterly Journal of Finance (QJF), 2013, vol. 03, issue 02, 1-12

Abstract: In a frictionless and competitive economy, where high frequency (HF) traders possess no market power, this paper characterizes necessary and sufficient conditions on the price process and information sets for HF traders to earn abnormal trading profits. Two sufficient conditions shown to generate abnormal returns are that HF trading enables the observation of short-term price momentum/reversals, not otherwise visible, or it enables the observation of signals correlated to future price movements. The welfare considerations of the existence of such abnormal trading profits are also discussed.

Keywords: High frequency trading; no arbitrage; martingale measures; information (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1142/S2010139213500122

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