Abstract

http://ssrn.com/abstract=2331613
 


 



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

September 26, 2013


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.

Number of Pages in PDF File: 51

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

JEL Classification: G10.

working papers series


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Date posted: September 28, 2013  

Suggested Citation

Ait-Sahalia, Yacine and Saglam, Mehmet, High Frequency Traders: Taking Advantage of Speed (September 26, 2013). Available at SSRN: http://ssrn.com/abstract=2331613 or http://dx.doi.org/10.2139/ssrn.2331613

Contact Information

Yacine Ait-Sahalia (Contact Author)
Princeton University - Department of Economics ( email )
Fisher Hall
Princeton, NJ 08544
United States
609-258-4015 (Phone)
609-258-5398 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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://mehmetsaglam.net
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