A Dynamic Limit Order Market with Fast and Slow Traders

38 Pages Posted: 10 Apr 2013

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: March 6, 2013

Abstract

We study the role of high-frequency trading in a dynamic limit order market. Being fast is valuable because it enables traders to revise outstanding limit orders upon news arrivals when interacting with slow market participants. On the one hand, the existence of fast traders can help to reduce the inefficiency that is rooted in the risk of being "picked off" after unfavourable price movements and therefore allows more gains from trade to be realized. On the other hand, slow traders face a relative loss in bargaining power which leads them to strategically submit limit orders with a lower execution probability, thereby reducing trade. Due to this negative externality, the equilibrium level of investment is always welfare-reducing. The model generates additional testable implications regarding the effects of high-frequency trading on order flow statistics.

Keywords: High-frequency trading, Limit Order Market

JEL Classification: G19, C72, D62

Suggested Citation

Hoffmann, Peter, A Dynamic Limit Order Market with Fast and Slow Traders (March 6, 2013). ECB Working Paper No. 1526. Available at SSRN: https://ssrn.com/abstract=2229213

Peter Hoffmann (Contact Author)

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

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
117
rank
45,480
Abstract Views
1,239
PlumX Metrics