High Frequency Traders: Taking Advantage of Speed
Yacine Ait-Sahalia and
No 19531, NBER Working Papers from National Bureau of Economic Research, Inc
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)
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