Information and Inventories in High-Frequency Trading
15 Pages Posted: 2 Sep 2015 Last revised: 4 Sep 2017
Date Written: September 4, 2017
We study how short-term informational advantages can be monetized in a high-frequency setting, when large inventories are explicitly penalized. We find that if most of the additional information is revealed regardless of the high-frequency traders' actions, then fast inventory management allows to minimize positions with only second-order losses to expected returns. This is no longer possible if most of the additional information is only revealed through trades.
Keywords: high frequency trading, information asymmetry, inventory management
JEL Classification: G14, G11, C61, C68
Suggested Citation: Suggested Citation