Optimal Strategies of High Frequency Traders

AFA 2015 Boston Meetings Paper

50 Pages Posted: 21 Jan 2014 Last revised: 15 Nov 2015

See all articles by Jiangmin Xu

Jiangmin Xu

Peking University - Guanghua School of Management

Date Written: November 14, 2015

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

Suggested Citation

Xu, Jiangmin, Optimal Strategies of High Frequency Traders (November 14, 2015). AFA 2015 Boston Meetings Paper, Available at SSRN: https://ssrn.com/abstract=2382378 or http://dx.doi.org/10.2139/ssrn.2382378

Jiangmin Xu (Contact Author)

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

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