A Multiscale Model of High-Frequency Trading

41 Pages Posted: 26 Apr 2012  

Richard Sowers

University of Illinois at Urbana-Champaign - Department of Mathematics

Andrei A. Kirilenko

Imperial College London - Centre for Global Finance and Technology

Xiangqian Meng

University of Illinois at Urbana-Champaign

Date Written: April 25, 2012

Abstract

We propose and study a stylization of high frequency trading (HFT). Our interest is an order book which consists of orders from slow liquidity traders and orders from high-frequency traders.We would like to frame a model which is amenable to the (seemingly natural) mathematical toolkit of separation of scales and which can be used to address some of the larger issues involved in HFT.

The main issue to which we address our model is volatility. An important question is how volatility is affected by HFT. In our stylized model, we show how HFT increases volatility, and can quantify this effect as a function of the parameters in our model and the separation of scales.

Suggested Citation

Sowers, Richard and Kirilenko, Andrei A. and Meng, Xiangqian, A Multiscale Model of High-Frequency Trading (April 25, 2012). Algorithmic Finance (2013), 2:1, 59-98. Available at SSRN: https://ssrn.com/abstract=2046199 or http://dx.doi.org/10.2139/ssrn.2046199

Richard Sowers (Contact Author)

University of Illinois at Urbana-Champaign - Department of Mathematics ( email )

1409 W. Green St.
Urbana, IL 61801
United States

HOME PAGE: http://www.math.uiuc.edu/~r-sowers/

Andrei A. Kirilenko

Imperial College London - Centre for Global Finance and Technology ( email )

South Kensington Campus
London, SW7 2AZ
United Kingdom

Xiangqian Meng

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

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