Limit Order Markets, High Frequency Traders and Asset Prices

Jakša Cvitanic, Andrei Kirilenko: Do high frequency traders affect transaction prices? In this paper we derive the distribution of transaction prices in limit order markets populated by low frequency traders before and after the entrance of a high frequency trader (HFT).

Author(s):

Jaksa Cvitanic

EDHEC Business School

Andrei Kirilenko

Commodity Futures Trading Commission

We find that in a market with an HFT, the distribution of transaction prices has more mass around the center and thinner far tails. The intra-trade duration decreases in proportion to the ratio of the low frequency orders arrival rates with and without the presence of the HFT; trading volume goes up in proportion to the same ratio. We show that the HFT makes positive expected profits by “sniping out” low frequency orders somewhat away from the front of the book. In a special case, the faster low frequency orders are submitted and higher their variance, the more profits the HFT makes, while possibly offering a wider bid-ask spread. Another prediction is that in the times of high liquidity and/or low uncertainty the HFT trades around the current mean price, while in the times of low liquidity and/or high uncertainty, its trades move towards the estimated future price.
Pdf
Limit Order Markets, High Frequency Traders and Asset Prices...
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Type: Working paper
Date: le 03/10/2011
Extra information : For more information, please contact EDHEC Research and Development Department [ research@drd.edhec.edu ]
Research Cluster : Finance

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