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Empirical Limitations on High Frequency Trading Profitability

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  • Michael Kearns
  • Alex Kulesza
  • Yuriy Nevmyvaka
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    Abstract

    Addressing the ongoing examination of high-frequency trading practices in financial markets, we report the results of an extensive empirical study estimating the maximum possible profitability of the most aggressive such practices, and arrive at figures that are surprisingly modest. By "aggressive" we mean any trading strategy exclusively employing market orders and relatively short holding periods. Our findings highlight the tension between execution costs and trading horizon confronted by high-frequency traders, and provide a controlled and large-scale empirical perspective on the high-frequency debate that has heretofore been absent. Our study employs a number of novel empirical methods, including the simulation of an "omniscient" high-frequency trader who can see the future and act accordingly.

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    File URL: http://arxiv.org/pdf/1007.2593
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1007.2593.

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    Date of creation: Jul 2010
    Date of revision: Sep 2010
    Handle: RePEc:arx:papers:1007.2593

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    Web page: http://arxiv.org/

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    Cited by:
    1. Manahov, Viktor & Hudson, Robert & Gebka, Bartosz, 2014. "Does high frequency trading affect technical analysis and market efficiency? And if so, how?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 131-157.

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