A dynamic limit order market with fast and slow traders
We 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.
|Date of creation:||Jul 2012|
|Date of revision:||Jan 2013|
|Contact details of provider:|| Postal: |
Web page: http://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- FOUCAULT, Thierry & RÖELL, Ailsa & SANDAS, Patrik, 2000.
"Market Making with Costly Monitoring : An Analysis of the SOES Controversy,"
Les Cahiers de Recherche
702, HEC Paris.
- Thierry Foucault & Ailsa Röell & Patrik Sandås, 2003. "Market Making with Costly Monitoring: An Analysis of the SOES Controversy," Review of Financial Studies, Society for Financial Studies, vol. 16(2), pages 345-384.
- Colliard, Jean-Edouard & Foucault, Thierry, 2011.
"Trading Fees and Efficiency in Limit Order Markets,"
CEPR Discussion Papers
8395, C.E.P.R. Discussion Papers.
- Jean-Edouard Colliard & Thierry Foucault, 2012. "Trading Fees and Efficiency in Limit Order Markets," Review of Financial Studies, Society for Financial Studies, vol. 25(11), pages 3389-3421.
- Hendershott, Terrence & Jones, Charles M. & Menkveld, Albert J., 2008.
"Does algorithmic trading improve liquidity?,"
CFS Working Paper Series
2008/41, Center for Financial Studies (CFS).
- Álvaro Cartea & José Penalva, 2011. "Where is the value in high frequency trading?," Banco de Espa�a Working Papers 1111, Banco de Espa�a.
- Garvey, Ryan & Wu, Fei, 2010. "Speed, distance, and electronic trading: New evidence on why location matters," Journal of Financial Markets, Elsevier, vol. 13(4), pages 367-396, November.
- Foucault, Thierry, 1999. "Order flow composition and trading costs in a dynamic limit order market1," Journal of Financial Markets, Elsevier, vol. 2(2), pages 99-134, May.
- Copeland, Thomas E & Galai, Dan, 1983. " Information Effects on the Bid-Ask Spread," Journal of Finance, American Finance Association, vol. 38(5), pages 1457-69, December.
- Liu, Wai-Man, 2009. "Monitoring and limit order submission risks," Journal of Financial Markets, Elsevier, vol. 12(1), pages 107-141, February.
- Alain Chaboud & Benjamin Chiquoine & Erik Hjalmarsson & Clara Vega, 2009. "Rise of the machines: algorithmic trading in the foreign exchange market," International Finance Discussion Papers 980, Board of Governors of the Federal Reserve System (U.S.).
- Goettler, Ronald L. & Parlour, Christine A. & Rajan, Uday, 2009. "Informed traders and limit order markets," Journal of Financial Economics, Elsevier, vol. 93(1), pages 67-87, July.
- repec:dgr:uvatin:20120141 is not listed on IDEAS
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:44621. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht)
If references are entirely missing, you can add them using this form.