Equilibrium High-Frequency Trading

Biais, Bruno; Foucault, Thierry; Moinas, Sophie

doi:10.2139/ssrn.2024360

Cited by 137 publications

(115 citation statements)

References 23 publications

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“…Others, however, question this view. Biais, Foucault, and Moinas (2011) demonstrate mathematically that while HFTs and other high-speed traders may generate gains-from-trade, they also can increase adverse selection, price impact, and generate negative externalities, so that there may be more investment in HFT than is societally optimal. Menkveld (2014) notes that while HFTs might promote welfare when they act as market makers, they reduce "welfare when HFTs pick off investors' quotes at superhuman speed on information that would have been revealed to investors anyway at a lower frequency" and suggests that "high-frequency traders might be engaged in a socially wasteful arms race … Overall, high-frequency traders over-invest in technology relative to a social optimum if the main motivation is to be ahead of rival HFTs when trading on a publicly observed signal."…”

mentioning

confidence: 93%

Computerized and High-Frequency Trading

Goldstein

Kumar²,

Graves³

2014

SSRN Journal

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mentioning

confidence: 93%

Computerized and High-Frequency Trading

Goldstein

Kumar²,

Graves³

2014

SSRN Journal

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“…Such fees would therefore discourage traders from posting orders that are not intended to be executed (Prewitt, 2012). They will also discourage manipulative HFT strategies (like stuffing and spoofing) that involve massive order cancellations by rendering them uneconomical (Biais and Woolley, 2011;Prewitt, 2012). At the same time, rapid reaction to new information is often a way for market makers to minimize the risks of offering prices to other traders, and contributes to lower trading costs (Copeland and Galai, 1983;Foucault, Röell, and Sandås, 2003).…”

Section: Cancellation Feesmentioning

confidence: 99%

Market stability vs. market resilience: Regulatory policies experiments in an agent-based model with low- and high-frequency trading

Leal¹,

Napoletano

2019

Journal of Economic Behavior & Organization

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe investigate the effects of different regulatory policies directed towards high-frequency trading (HFT) through an agent-based model of a limit order book able to generate flash crashes as the result of the interactions between low-and high-frequency (HF) traders. We analyze the impact of the imposition of minimum resting times, of circuit breakers (both ex-post and ex-ante types), of cancellation fees and of transaction taxes on asset price volatility and on the occurrence and duration of flash crashes. In the model, lowfrequency agents adopt trading rules based on chronological time and can switch between fundamentalist and chartist strategies. In contrast, high-frequency traders activation is event-driven and depends on price fluctuations. In addition, high-frequency traders employ low-latency directional strategies that exploit market information and they can cancel their orders depending on expected profits. Monte-Carlo simulations reveal that reducing HF order cancellation, via minimum resting times or cancellation fees, or discouraging HFT via financial transaction taxes, reduces market volatility and the frequency of flash crashes. However, these policies also imply a longer duration of flash crashes. Furthermore, the introduction of an ex-ante circuit breaker markedly reduces price volatility and removes flash crashes. In contrast, ex-post circuit breakers do not affect market volatility and they increase the duration of flash crashes. Our results show that HFT-targeted policies face a trade-off between market stability and resilience. Policies that reduce volatility and the incidence of flash crashes also imply a reduced ability of the market to quickly recover from a crash. The dual role of HFT, as both a cause of the flash crash and a fundamental actor in the post-crash recovery underlies the above trade-off.

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“…We do not attempt to provide an overview of extant academic research here. The interested reader is referred to Biais and Woolley (2011).…”

Section: Computer-based Trading and Market Activitymentioning

confidence: 99%