Cartea, Álvaro, Sebastian Jaimungal, and Jason Ricci. "Buy low, sell high: A high frequency trading perspective." SIAM Journal on Financial Mathematics 5.1 (2014): 415-444.
37 Pages Posted: 26 Nov 2011 Last revised: 27 Apr 2015
Date Written: April 15, 2014
We develop a High Frequency (HF) trading strategy where the HF trader uses her superior speed to process information and to post limit sell and buy orders. By introducing a multi-factor mutually-exciting process we allow for feedback effects in market buy and sell orders and the shape of the limit order book (LOB). Our model accounts for arrival of market orders that influence activity, trigger one-sided and two-sided clustering of trades, and induce temporary changes in the shape of the LOB. We also model the impact that market orders have on the short-term drift of the midprice (short-term-alpha). We show that HF traders who do not include predictors of short-term-alpha in their strategies are driven out of the market because they are adversely selected by better informed traders and because they are not able to profit from directional strategies.
Keywords: Algorithmic Trading, High Frequency Trading, Short Term Alpha, Adverse Selection, Self-Exciting Processes, Hawkes Processes
JEL Classification: C6, C61, C63, G1, G10, G12, G17, G60
Suggested Citation: Suggested Citation
Cartea, Álvaro and Jaimungal, Sebastian and Ricci, Jason, Buy Low Sell High: A High Frequency Trading Perspective (April 15, 2014). Cartea, Álvaro, Sebastian Jaimungal, and Jason Ricci. "Buy low, sell high: A high frequency trading perspective." SIAM Journal on Financial Mathematics 5.1 (2014): 415-444.. Available at SSRN: https://ssrn.com/abstract=1964781 or http://dx.doi.org/10.2139/ssrn.1964781
By Jim Gatheral