A Dynamic Limit Order Market with Fast and Slow Traders

30 Pages Posted: 7 Dec 2011 Last revised: 28 Mar 2014

See all articles by Peter Hoffmann

Peter Hoffmann

European Central Bank (ECB) - Directorate General Research

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2013

Abstract

We study the role of high-frequency trading in a dynamic limit order market. Fast traders' ability to revise their quotes quickly after news arrivals helps to reduce the inefficiency that is rooted in the risk of being "picked off", which increases trade. However, their presence induces slow traders to strategically submit limit orders with a lower execution probability, thereby reducing trade. Because speed is a source of market power, it enables fast traders to extract rents from others and triggers a costly arms race that reduces social welfare. The model generates a number of testable implications concerning the effects of high-frequency trading in limit order markets.

Keywords: High-frequency trading, Limit Order Markets

JEL Classification: G19, C72, D62

Suggested Citation

Hoffmann, Peter, A Dynamic Limit Order Market with Fast and Slow Traders (October 1, 2013). Available at SSRN: https://ssrn.com/abstract=1969392 or http://dx.doi.org/10.2139/ssrn.1969392

Peter Hoffmann (Contact Author)

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

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