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A multiscale model of high-frequency trading

Author

Listed:
  • Kirilenko, Andrei

    (Sloan School of Management, Massachusetts Institute of Technology)

  • Sowers, Richard B.

    (Department of Industrial and Enterprise Systems Engineering and Department of Mathematics)

  • Meng, Xiangqian

Abstract

We propose and study a stylization of high frequency trading (HFT). Our interest is an order book which consists of orders from slow liquidity traders and orders from high-frequency traders. We would like to frame a model which is amenable to the (seemingly natural) mathematical toolkit of separation of scales and which can be used to address some of the larger issues involved in HFT. The main issue to which we address our model is volatility. An important question is how volatility is affected by HFT. In our stylized model, we show how HFT increases volatility, and can quantify this effect as a function of the parameters in our model and the separation of scales.

Suggested Citation

  • Kirilenko, Andrei & Sowers, Richard B. & Meng, Xiangqian, 2013. "A multiscale model of high-frequency trading," Algorithmic Finance, IOS Press, vol. 2(1), pages 59-98.
    • Handle: RePEc:ris:iosalg:0025
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    Citations

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    Cited by:

    1. Jose Blanchet & Xinyun Chen, 2013. "Continuous-time Modeling of Bid-Ask Spread and Price Dynamics in Limit Order Books," Papers 1310.1103, arXiv.org.
    2. José Da Fonseca & Riadh Zaatour, 2017. "Correlation and Lead–Lag Relationships in a Hawkes Microstructure Model," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 37(3), pages 260-285, March.
    3. Xin Guo & Zhao Ruan & Lingjiong Zhu, 2015. "Dynamics of Order Positions and Related Queues in a Limit Order Book," Papers 1505.04810, arXiv.org, revised Oct 2015.
    4. Xuefeng Gao & S. J. Deng, 2014. "Hydrodynamic limit of order book dynamics," Papers 1411.7502, arXiv.org, revised Feb 2016.

    More about this item

    Keywords

    High frequency trading; volatility;

    JEL classification:

    • D00 - Microeconomics - - General - - - General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

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