A multiscale model of high-frequency trading

Andrei Kirilenko, Richard B. Sowers, Xiangqian Meng

Research output: Contribution to journalArticlepeer-review

Abstract

We propose and study a stylization of high frequency trading (HFT). Our interest is an order book which consists of orders from slow liquidity traders and orders from high-frequency traders. We would like to frame a model which is amenable to the (seemingly natural) mathematical toolkit of separation of scales and which can be used to address some of the larger issues involved in HFT. The main issue to which we address our model is volatility. An important question is how volatility is affected by HFT. In our stylized model, we show how HFT increases volatility, and can quantify this effect as a function of the parameters in our model and the separation of scales.

Original languageEnglish (US)
Pages (from-to)59-98
Number of pages40
JournalAlgorithmic Finance
Volume2
Issue number1
DOIs
StatePublished - 2013

Keywords

  • High frequency trading
  • Volatility

ASJC Scopus subject areas

  • Finance
  • Computer Vision and Pattern Recognition
  • Computer Science Applications
  • Computational Mathematics

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