Inventory Management for High-Frequency Trading with Imperfect Competition

DOI10.1137/18M1207776MaRDI QIDQ5215989zbMATH OpenFDO

Authors Sebastian Herrmann, Johannes Muhle-Karbe, Dapeng Shang, Chen Yang

Publication date 14 February 2020

Published in SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1808.05169, https://epubs.siam.org/doi/pdf/10.1137/18M1207776

zbMATH Keywords

high-frequency tradingimperfect competitioninformation asymmetryinventory management

Mathematics Subject Classification ID

Financial markets (91G15) Inventory, storage, reservoirs (90B05)

Abstract: We study Nash equilibria for inventory-averse high-frequency traders (HFTs), who trade to exploit information about future price changes. For discrete trading rounds, the HFTs' optimal trading strategies and their equilibrium price impact are described by a system of nonlinear equations; explicit solutions obtain around the continuous-time limit. Unlike in the risk-neutral case, the optimal inventories become mean-reverting and vanish as the number of trading rounds becomes large. In contrast, the HFTs' risk-adjusted profits and the equilibrium price impact converge to their risk-neutral counterparts. Compared to a social-planner solution for cooperative HFTs, Nash competition leads to excess trading, so that marginal transaction taxes in fact decrease market liquidity.

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Cites work

• Continuous Auctions and Insider Trading
• Insider trading with a random deadline
• Risk aversion, imperfect competition, and long-lived information

Cited in

(4)

• Optimal trading and competition with information in the price impact model
• Investment in high-frequency trading technology: a real options approach
• High-frequency limit of Nash equilibria in a market impact game with transient price impact
• A market impact game under transient price impact

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