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Investment in High Frequency Trading Technology: A Real Options Approach

Delaney, L. ORCID: 0000-0003-0944-9894 (2018). Investment in High Frequency Trading Technology: A Real Options Approach. European Journal of Operational Research, 270(1), pp. 375-385. doi: 10.1016/j.ejor.2018.03.025

Abstract

This paper derives an optimal timing strategy for a regular slow trader considering investing in a high-frequency trading (HFT) technology. The market is fragmented, and slow traders compete with fast traders for trade execution. Given this optimal timing rule, I then char- acterise the equilibrium level of fast trading in the market as well as the welfare-maximising socially optimal level. I show that there is always a unique cost of investment such that the equilibrium level of fast trading and the socially optimal level coincide. Finally I discuss potential policy responses to addressing equilibrium and social optimality misalignment in HFT.

Publication Type: Article
Additional Information: © 2018 Elsevier. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Publisher Keywords: Finance, High frequency trading, Fragmented markets, Real options
Departments: School of Arts & Social Sciences > Economics
URI: http://openaccess.city.ac.uk/id/eprint/19292
[img] Text - Accepted Version
This document is not freely accessible until 26 March 2020 due to copyright restrictions.
Available under License Creative Commons Attribution Non-commercial No Derivatives.

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