High Frequency Traders: Taking Advantage of Speed

52 Pages Posted: 18 Oct 2013

See all articles by Yacine Ait-Sahalia

Yacine Ait-Sahalia

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Mehmet Saglam

University of Cincinnati - Department of Finance - Real Estate

Multiple version iconThere are 2 versions of this paper

Date Written: October 2013

Abstract

We propose a model of dynamic trading where a strategic high frequency trader receives an imperfect signal about future order flows, and exploits his speed advantage to optimize his quoting policy. We determine the provision of liquidity, order cancellations, and impact on low frequency traders as a function of both the high frequency trader's latency, and the market volatility. The model predicts that volatility leads high frequency traders to reduce their provision of liquidity. Finally, we analyze the impact of various policies designed to potentially regulate high frequency trading.

Suggested Citation

Ait-Sahalia, Yacine and Saglam, Mehmet, High Frequency Traders: Taking Advantage of Speed (October 2013). NBER Working Paper No. w19531, Available at SSRN: https://ssrn.com/abstract=2342011

Yacine Ait-Sahalia (Contact Author)

Princeton University - Department of Economics ( email )

Fisher Hall
Princeton, NJ 08544
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National Bureau of Economic Research (NBER)

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Mehmet Saglam

University of Cincinnati - Department of Finance - Real Estate ( email )

Carl H. Lindner College of Business
Cincinnati, OH 45221
United States
(513) 556-9108 (Phone)

HOME PAGE: http://homepages.uc.edu/~saglammt/

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