The Effects of High-frequency Anticipatory Trading: Small Informed Trader vs. Round-Tripper
Trading and Market Microstructure
2024-02-27 v3 General Economics
Economics
Mathematical Finance
Abstract
In an extended Kyle's model, the interactions between a large informed trader and a high-frequency trader (HFT) who can anticipate the former's incoming order are studied. We find that, in equilibrium, HFT may play the role of Small-IT or Round-Tripper: both of them trade in the same direction as IT in advance, but when IT's order arrives, Small-IT continues to take liquidity away, while Round-Tripper supplies liquidity back. So Small-IT always harms IT, while Round-Tripper may benefit her. What's more, with an anticipatory HFT, normal-speed small uninformed traders suffer less and price discovery is accelerated.
Keywords
Cite
@article{arxiv.2304.13985,
title = {The Effects of High-frequency Anticipatory Trading: Small Informed Trader vs. Round-Tripper},
author = {Ziyi Xu and Xue Cheng},
journal= {arXiv preprint arXiv:2304.13985},
year = {2024}
}