Abstract:
We develop a High Frequency (HF) trading strategy where the HF trader uses her superior speed to process information and to post limit sell and buy orders. We introduce a multi-factor self-exciting process which allows for feedback effects in market buy and sell orders and the shape of the limit order book (LOB). The model accounts for arrival of market orders that influence activity, trigger one-sided and two-sided clustering of trades, and induce temporary changes in the shape of the LOB. The resulting strategy outperforms the Poisson strategy where the trader does not distinguish between influential and non-influential events.
Cartea, Álvaro, Jaimungal, Sebastian and Ricci, Jason, Buy Low Sell High: A High Frequency Trading Perspective (November 25, 2011). Available at SSRN: http://ssrn.com/abstract=1964781
