TY - UNPB
T1 - Inventory Management for High-Frequency Trading with Imperfect Competition
AU - Herrmann, Sebastian
AU - Muhle-Karbe, Johannes
AU - Shang, Dapeng
AU - Yang, Chen
PY - 2018/8/15
Y1 - 2018/8/15
N2 - 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.
AB - 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.
UR - https://www.scopus.com/pages/publications/85092810600
U2 - 10.2139/ssrn.3232037
DO - 10.2139/ssrn.3232037
M3 - Working paper
T3 - SSRN eLibrary
BT - Inventory Management for High-Frequency Trading with Imperfect Competition
ER -