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.

Type: Working paper
Date: le 03/10/2011
Research Cluster : Finance

See Also

How to make LEGACY A PATH TO THE FUTURE: A CONVERSATION WITH DELPHINE ARNAULT, EXECUTIVE VICE PRESIDENT OF LOUIS VUITTON
News
- 18-01-2022
We discussed with Delphine Arnault, Executive Vice President of Louis Vuitton and EDHEC...
The fight against climate change central to the EDHEC-Coursera specialisation
News
- 18-01-2022
EDHEC Business School launched the “Climate Change and Sustainable Investing”...
Meet an Alumnus: prepared for a managerial role
News
- 18-01-2022
Laurent Benichou joined VeryChic, AccorHotels group’s online travel agency as Area...
« The Future of Finance » : EDHEC affirms its financial-sector leadership with an inaugural series of forward-looking, academic-value-added lectures
News
- 17-01-2022
EDHEC Business School plans to host a series of monthly lectures entitled “The Future...