Low-frequency Traders Research Articles

The Volume Clock: Insights into the High Frequency Paradigm

Over the last two centuries, technological advantages have allowed some traders to be faster than others. We argue that, contrary to popular perception, speed is not the defining characteristic that sets High Frequency Trading (HFT) apart. HFT is the natural evolution of a new trading paradigm that is characterized by strategic decisions made in a volume-clock metric. Even if the speed advantage disappears, HFT will evolve to continue exploiting Low Frequency Trading’s (LFT) structural weaknesses. However, LFT practitioners are not defenseless against HFT players, and we offer options that can help them survive and adapt to this new environment.

Fairness in Financial Markets: The Case of High Frequency Trading

Recent concern over frequency (HFT) has called into question the fairness of the practice. What does it mean for a financial market to be fair? We first examine how high frequency trading is actually used. High frequency traders are often implementing traditional beneficial strategies such as market making and arbitrage, although computers can also be used for manipulative strategies as well. We then examine different notions of fairness. Procedural fairness can be viewed from the perspective of equal opportunity, in which all market participants are treated alike. The same rules apply to HFT as to other traders. Another approach to fairness is in the equality of outcomes. Many HFT strategies are beneficial to other market participants, so one cannot categorically denounce the practice as unfair. Other strategies, for both high and low frequency trading, are not. It is thus important to distinguish between the technology and the use of the technology to make judgments on fairness.

High Frequency Traders and Asset Prices

Do high frequency traders affect transaction prices? In this paper we derive distributions of transaction prices in limit order markets populated by low frequency traders (humans) before and after the entrance of a high frequency trader (machine). We find that the presence of a machine is likely to change the average transaction price, even in the absence of new information. We also find that in a market with a high frequency trader, the distribution of transaction prices has more mass around the center and thinner far tails. With a machine, mean intertrade duration decreases in proportion to the increase in the ratio of the human order arrival rates with and without the presence of the machine; trading volume goes up by the same rate. We show that the machine makes positive expected profits by sniping out human orders somewhat away from the front of the book. This explains the shape of the transaction price density. In fact, we show that in a special case, the faster humans submit and vary their orders, the more profits the machine makes.