Strategic Liquidity Provision in High Frequency Trading
Posted: 19 Oct 2019 Last revised: 10 Apr 2024
Date Written: May 1, 2024
Abstract
We construct a Kyle (1985)-type market model in which fast and slow traders are present. We perform numerical calculations after deriving the equilibrium condition, described as a simultaneous equation system. A major finding is that the fast trader, who has an advantage in trade frequency, acts as a liquidity provider, taking the opposite position against the slow trader if the difference in frequency is significant. Our theoretical results appear to be consistent with the empirical results of previous studies.
Keywords: High Frequency Trading, Market Micro-Structure, Strategic Liquidity Provision
JEL Classification: D43, D82, G12
Suggested Citation: Suggested Citation