Publish Date:

Jun 12, 2024

Serial Number:

2024PA1003

Views: 195
Downloads: 3
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Rama Cont

@ramacont

Professor of Mathematics, Chair of Mathematical Finance, University of Oxford

Fast and Slow Optimal Trading with Exogenous Information

Key Findings


We model the interaction between an investor executing trades at low frequency and a high-frequency trader as a multiperiod stochastic Stackelberg game. The high-frequency trader exploits price information more frequently and is subject to periodic inventory constraints.


Abstract


We are able to explicitly compute the equilibrium strategies, in two steps. We first derive the optimal strategy of the high-frequency trader given any strategy adopted by the investor. Then, we solve the problem of the investor given the optimal strategy of the high-frequency trader, in terms of the resolvent of a Fredholm integral equation. Our results show that the high-frequency trader adopts a predatory strategy whenever the value of the trading signal is high, and follows a cooperative strategy otherwise. We also show that there is a net gain in performance for the investor from taking into account the order flow of the high-frequency trader. A U-shaped intraday pattern in trading volume is shown to arise endogenously as a result of the strategic behavior of the agents.

  • I. Roşu. Fast and slow informed trading. Journal of Financial Markets, 43:1–30, 2019. T. Schöneborn and A. Schied. Liquidation in the face of adversity: stealth vs. sunshine trading, 2009. EFA 2008 Athens Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1007014.

  • #Options Trading
  • #Trading Strategies

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Category

  • Trading

Author Type

  • Academic

Authors

  • Rama Cont