Buy Low Sell High: A High Frequency Trading Perspective

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

Álvaro Cartea

University of Oxford; University of Oxford - Oxford-Man Institute of Quantitative Finance

Sebastian Jaimungal

University of Toronto - Department of Statistics

Jason Ricci

University of Toronto, Department of Statistics

Date Written: April 15, 2014

Abstract

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

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

Álvaro Cartea (Contact Author)

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

Sebastian Jaimungal

University of Toronto - Department of Statistics ( email )

100 St. George St.
Toronto, Ontario M5S 3G3
Canada

HOME PAGE: http://www.utstat.utoronto.ca/sjaimung

Jason Ricci

University of Toronto, Department of Statistics ( email )

Department of Statistical Sciences
Toronto, Ontario M5S 3G8
Canada

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