The optimal bid-ask price strategies of high-frequency trading and the effect on market liquidity |
| |
Institution: | 1. School of Economics and Management, Beihang University, Beijing, 100191, China;2. Beijing Advanced Innovation Center for Big Data and Brain Computing, Beihang University, Beijing, 100191, China;3. Key Laboratory of Complex System Analysis, Management and Decision, Ministry of Education, Beihang University, Beijing, 100191, China |
| |
Abstract: | We propose a model for determining the optimal bid-ask spread strategy by a high-frequency trader (HFT) who has an informational advantage and receives information about the true value of a security. We employ an information cost function that includes volatility and the volume of the asset. Subsequently, we characterize the optimal bid-ask price strategies and obtain a stable bid-ask spread. We assume that orders submitted by low-frequency traders (LFTs) and news events arrive at the market with Poisson processes. Additionally, our model supports the trading of the two-sided quote in one period. We find that more LFTs and a higher exchange latency both hurt market liquidity. The HFT prefers to choose a two-sided quote to gain more profits while cautiously chooses a one-sided quote during times of high volatility. The model generates some testable implications with supporting empirical evidence from the NASDAQ-OMX Nordic Market. |
| |
Keywords: | High-frequency trading Optimal strategies Stable bid-ask spread Market liquidity |
本文献已被 ScienceDirect 等数据库收录! |
|