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Information and Inventories in High-Frequency Trading

Author

Listed:
  • Johannes Muhle-Karbe

    (ETH Zurich and Swiss Finance Institute)

  • Kevin Webster

    (Princeton University)

Abstract

We propose an equilibrium model for the short-term informational advantages crucial in high-frequency trading. In this setting, risk-neutral insiders hold martingale inventories. In contrast, inventory aversion leads to autoregressive positions. These vanish in the continuous-time limit, while still yielding approximately the same returns. This illustrates how high-frequency trading allows to monetize information with very little inventory risk.

Suggested Citation

  • Johannes Muhle-Karbe & Kevin Webster, 2015. "Information and Inventories in High-Frequency Trading," Swiss Finance Institute Research Paper Series 15-35, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1535
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    File URL: http://ssrn.com/abstract=2654277
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    More about this item

    Keywords

    high frequency trading; information asymmetry; inventory management;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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