High Frequency Traders: Taking Advantage of Speed

Yacine Ait-Sahalia

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Mehmet Saglam

University of Cincinnati - Department of Finance - Real Estate

May 15, 2014

We propose a model of dynamic trading where a strategic high frequency trader receives an imperfect signal about the future order flow, and exploits his speed advantage to act as a market maker. We determine the provision of liquidity, order cancellations, and impact on low frequency traders. The model predicts that volatility leads high frequency traders to reduce their provision of liquidity. Next, we analyze the problem when the high frequency trader competes with another market maker. Finally, we provide the first formal, model-based analysis of the impact of various policies designed to regulate high frequency trading.

Number of Pages in PDF File: 56

Keywords: High Frequency Trading, Market Making, Liquidity, Order Cancellations, Competition for Order Flow, Tobin Tax, Order Resting Time, Order Cancellation Tax

JEL Classification: G10

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Date posted: September 28, 2013 ; Last revised: May 16, 2014

Suggested Citation

Ait-Sahalia, Yacine and Saglam, Mehmet, High Frequency Traders: Taking Advantage of Speed (May 15, 2014). Available at SSRN: http://ssrn.com/abstract=2331613 or http://dx.doi.org/10.2139/ssrn.2331613

Contact Information

Yacine Ait-Sahalia (Contact Author)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Princeton University - Department of Economics ( email )
Fisher Hall
Princeton, NJ 08544
United States
609-258-4015 (Phone)
609-258-5398 (Fax)
Mehmet Saglam
University of Cincinnati - Department of Finance - Real Estate ( email )
College of Business Administration
Cincinnati, OH 45221
United States
(513) 556-9108 (Phone)
HOME PAGE: http://homepages.uc.edu/~saglammt/
Feedback to SSRN

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