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arXiv · 2304.13985

The Effects of High-frequency Anticipatory Trading: Small Informed Trader vs. Round-Tripper

Ziyi Xu·Xue Cheng
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Abstract

In an extended Kyle's model, the interactions between a large informed trader and a high-frequency trader (HFT) who can anticipate the former's incoming order are studied. We find that, in equilibrium, HFT may play the role of Small-IT or Round-Tripper: both of them trade in the same direction as IT in advance, but when IT's order arrives, Small-IT continues to take liquidity away, while Round-Tripper supplies liquidity back. So Small-IT always harms IT, while Round-Tripper may benefit her. What's more, with an anticipatory HFT, normal-speed small uninformed traders suffer less and price discovery is accelerated.

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Ziyi Xu, Xue Cheng. 2023-04-27. The Effects of High-frequency Anticipatory Trading: Small Informed Trader vs. Round-Tripper. https://arxiv.org/abs/2304.13985

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