Strategic Liquidity Provision in High Frequency Trading

Abstract

We construct a Kyle (1985)-type market model in which fast and slow traders are present. After deriving the equilibrium condition described as a simultaneous equation system, we will perform numerical calculations. A major finding is that the fast trader who has an advantage in trade frequency acts as a liquidity provider, in that he takes the opposite position against the slow trader, if the difference in frequency is significant. Our theoretical results seem generally consistent with the empirical results of previous studies.

Keywords: High Frequency Trading, Market Micro-Structure, Strategic Liquidity Provision

JEL Classification: D43, D82, G12