Abstract

http://ssrn.com/abstract=1569067
 
 

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High Frequency Traders and Asset Prices


Jaksa Cvitanic


California Institute of Technology - Division of the Humanities and Social Sciences

Andrei A. Kirilenko


Massachusetts Institute of Technology (MIT) Sloan School of Management

March 11, 2010


Abstract:     
Do high frequency traders affect transaction prices? In this paper we derive distributions of transaction prices in limit order markets populated by low frequency traders (humans) before and after the entrance of a high frequency trader (machine). We find that the presence of a machine is likely to change the average transaction price, even in the absence of new information. We also find that in a market with a high frequency trader, the distribution of transaction prices has more mass around the center and thinner far tails. With a machine, mean intertrade duration decreases in proportion to the increase in the ratio of the human order arrival rates with and without the presence of the machine; trading volume goes up by the same rate. We show that the machine makes positive expected profits by "sniping" out human orders somewhat away from the front of the book. This explains the shape of the transaction price density. In fact, we show that in a special case, the faster humans submit and vary their orders, the more profits the machine makes.

Number of Pages in PDF File: 30

Keywords: high-frequency trading, algorithmic trading, asset prices, limit order market

JEL Classification: D4, G1

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Date posted: March 15, 2010  

Suggested Citation

Cvitanic, Jaksa and Kirilenko, Andrei A., High Frequency Traders and Asset Prices (March 11, 2010). Available at SSRN: http://ssrn.com/abstract=1569067 or http://dx.doi.org/10.2139/ssrn.1569067

Contact Information

Jaksa Cvitanic
California Institute of Technology - Division of the Humanities and Social Sciences ( email )
1200 East California Blvd.
Pasadena, CA 91125
United States
HOME PAGE: http://www.hss.caltech.edu/~cvitanic/
Andrei A. Kirilenko (Contact Author)
Massachusetts Institute of Technology (MIT) Sloan School of Management ( email )
100 Main Street
E62-612
Cambridge, MA 02142
United States
HOME PAGE: http://mitsloan.mit.edu/faculty/detail.php?in_spseqno=54152
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