15 Pages Posted: 22 Sep 2010
Date Written: September 17, 2010
Addressing the ongoing examination of high-frequency trading practices in financial markets, we report the results of an extensive empirical study estimating the maximum possible profitability of the most aggressive such practices, and arrive at figures that are surprisingly modest. By "aggressive" we mean any trading strategy exclusively employing market orders and relatively short holding periods. Our findings highlight the tension between execution costs and trading horizon confronted by high-frequency traders, and provide a controlled and large-scale empirical perspective on the high-frequency debate that has heretofore been absent. Our study employs a number of novel empirical methods, including the simulation of an "omniscient" high-frequency trader who can see the future and act accordingly.
Keywords: Computational Finance, Market Microstructure
JEL Classification: C80, C87, D40, G10
Suggested Citation: Suggested Citation
Kearns, Michael and Kulesza, Alex and Nevmyvaka, Yuriy, Empirical Limitations on High Frequency Trading Profitability (September 17, 2010). Available at SSRN: https://ssrn.com/abstract=1678758 or http://dx.doi.org/10.2139/ssrn.1678758