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Capability satisficing in high frequency trading

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  • Van Vliet, Ben

Abstract

This paper explains the capability theory of how HFT firms make allocation decisions under uncertainty, and shows how capability maximization is precisely consistent with utility theory. The issue, however, is how these firms actually make allocation decisions in practice. Using the Gioia methodology, this paper presents evidence from interviews with HFT professionals and specialist media that suggest that these firms are capability satisficers. Capability theory is also consistent with bounded rationality and the adaptive markets hypothesis, and defines the point at which these firms reach a satisfactory solution. Thus, capability reconciles mainstream theory and the more realistic, behavioral theories based on observation of industry practice. The methodology developed can be applied to any firm that makes algorithmic decisions under uncertainty.

Suggested Citation

  • Van Vliet, Ben, 2017. "Capability satisficing in high frequency trading," Research in International Business and Finance, Elsevier, vol. 42(C), pages 509-521.
    • Handle: RePEc:eee:riibaf:v:42:y:2017:i:c:p:509-521
    DOI: 10.1016/j.ribaf.2017.03.002
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    3. Sánchez Serrano Antonio, 2020. "High-Frequency Trading and Systemic Risk: A Structured Review of Findings and Policies," Review of Economics, De Gruyter, vol. 71(3), pages 169-195, December.

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