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High Frequency Traders: Taking Advantage of Speed

Yacine Ait-Sahalia and Mehmet Saglam

No 19531, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose a model of dynamic trading where a strategic high frequency trader receives an imperfect signal about future order flows, and exploits his speed advantage to optimize his quoting policy. We determine the provision of liquidity, order cancellations, and impact on low frequency traders as a function of both the high frequency trader's latency, and the market volatility. The model predicts that volatility leads high frequency traders to reduce their provision of liquidity. Finally, we analyze the impact of various policies designed to potentially regulate high frequency trading.

JEL-codes: G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mst
Date: 2013-10
Note: AP
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