Algorithmic and High Frequency Trading in Dynamic Limit Order Markets
54 Pages Posted: 11 Nov 2013 Last revised: 13 Mar 2019
Date Written: June 6, 2017
We present a dynamic equilibrium model to understand differences and interactions between informational and trading speed advantages. The model is a stochastic asynchronous game, with endogenous trading decisions and non-cooperation among agents, in a limit order market. We show that welfare and market quality improve (deteriorate), when there are traders with only informational (trading speed) superiority. However, when informational and trading speed advantages are 'combined', welfare and market quality improve more than when there are traders with only additional information. Furthermore, we evaluate regulations related to reduce adverse selection effects of some agents using these advantages against less-skilled traditional traders.
Keywords: Informational advantage; trading speed advantage; limit order market; market quality; welfare.
JEL Classification: C63, C73, G11, G14.
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