A dynamic limit order market with fast and slow traders
AbstractWe study the role of high-frequency trading in a dynamic limit order market. Being fast is valuable because it enables traders to revise outstanding limit orders upon news arrivals when interacting with slow market participants. On the one hand, the existence of fast traders can help to reduce the inefficiency that is rooted in the risk of being "picked off" after unfavourable price movements and therefore allows more gains from trade to be realized. On the other hand, slow traders face a relative loss in bargaining power which leads them to strategically submit limit orders with a lower execution probability, thereby reducing trade. Due to this negative externality, the equilibrium level of investment is always welfare-reducing. The model generates additional testable implications regarding the effects of high-frequency trading on order flow statistics.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 44621.
Date of creation: Jul 2012
Date of revision: Jan 2013
High-frequency trading; Limit Order Market;
Find related papers by JEL classification:
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D62 - Microeconomics - - Welfare Economics - - - Externalities
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G19 - Financial Economics - - General Financial Markets - - - Other
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