Simulating the Synchronizing Behavior of High-Frequency Trading in Multiple Markets
AbstractNearly one-half of all trades in financial markets are executed by high-speed, autonomous computer programs -- a type of trading often called high-frequency trading (HFT). Although evidence suggests that HFT increases the efficiency of markets, it is unclear how or why it produces this outcome. Here we create a simple model to study the impact of HFT on investors who trade similar securities in different markets. We show that HFT can improve liquidity by allowing more transactions to take place without adversely affecting pricing or volatility. In the model, HFT synchronizes the prices of the securities, which allows buyers and sellers to find one another across markets and increases the likelihood of competitive orders being filled.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1311.4160.
Date of creation: Nov 2013
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-11-22 (All new papers)
- NEP-FMK-2013-11-22 (Financial Markets)
- NEP-MST-2013-11-22 (Market Microstructure)
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