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 Policy & Global Affairs > Department of Economics |
| SWORD Depositor: |
Available under License Creative Commons Attribution Non-commercial No Derivatives.
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