NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

High Frequency Traders: Taking Advantage of Speed

Yacine Aït-Sahalia, Mehmet Saglam

NBER Working Paper No. 19531
Issued in October 2013
NBER Program(s):   AP

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.

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Document Object Identifier (DOI): 10.3386/w19531

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