Optimal Strategies of High Frequency Traders

Abstract

This paper develops a model of the optimal strategies of high-frequency traders (HFTs) to rationalize their pinging activities. Pinging is defined as limit orders submitted inside the bid-ask spread that are cancelled shortly. The HFT in my model uses pinging to control his inventory or chase the short-term price momentum without learning or manipulative motives. I show that the model can match over 70% of the pinging activities observed in the data, and demonstrate how the HFT's pinging behaviors vary across stocks. The result confirms that pinging is rationalizable as part of the dynamic trading strategies of HFTs.

Keywords: High Frequency Trading, Pinging

JEL Classification: G10