Information and Inventories in High-Frequency Trading

15 Pages Posted: 2 Sep 2015 Last revised: 4 Sep 2017

See all articles by Johannes Muhle-Karbe

Johannes Muhle-Karbe

Imperial College London - Department of Mathematics

Kevin Webster

Princeton University

Date Written: September 4, 2017

Abstract

We study how short-term informational advantages can be monetized in a high-frequency setting, when large inventories are explicitly penalized. We find that if most of the additional information is revealed regardless of the high-frequency traders' actions, then fast inventory management allows to minimize positions with only second-order losses to expected returns. This is no longer possible if most of the additional information is only revealed through trades.

Keywords: high frequency trading, information asymmetry, inventory management

JEL Classification: G14, G11, C61, C68

Suggested Citation

Muhle-Karbe, Johannes and Webster, Kevin, Information and Inventories in High-Frequency Trading (September 4, 2017). Swiss Finance Institute Research Paper No. 15-35, Available at SSRN: https://ssrn.com/abstract=2654277 or http://dx.doi.org/10.2139/ssrn.2654277

Johannes Muhle-Karbe (Contact Author)

Imperial College London - Department of Mathematics ( email )

South Kensington Campus
Imperial College
LONDON, SW7 2AZ
United Kingdom

Kevin Webster

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

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