Capability satisficing in high frequency trading |
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| Institution: | 1. The Higher Institute of Management, ISG Tunis, Tunisia;2. Université de Tunis, ISG, GEF2A lab, Tunis, Tunisia;3. Faculty of Law, Economics and Management of Jendouba, Tunisia;4. Faculty of Economic and Management of Nabeul, Tunisia;1. Energy Planning Program, COPPE, Universidade Federal do Rio de Janeiro, RJ, Brazil;2. PPE-COPPE/UFRJ, Brazil;1. University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group, Richmond Building, Portland Street, PO1 3DE, United Kingdom;2. Al Yamamah University, 7010 King Fahd Road, Al Qirawan, Riyadh 13541, Saudi Arabia;1. Department of Public Finance, Aksaray University, Aksaray, Turkey;2. TARC, University of Exeter, UK;3. Faculty of Management, IBS/IFHE Hyderabad, Room No: C-204, Hyderabad, India;4. Montpellier Business School, Montpellier, France;5. Faculty of Economics and Business Management, National University of Laos, Lao Democratic People’s Republic |
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| 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. |
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| Keywords: | High frequency trading Adaptive markets hypothesis Capability theory Satisficing |
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