Departmental Papers (CIS)

Date of this Version

2010

Document Type

Journal Article

Comments

Kearns, M., Kulesza, A., & Nevmyvaka, Y., Empirical Limitations on High Frequency Trading Profitability, Journal of Trading, 2010

Abstract

Addressing the ongoing examination of high-frequency trading practices in financial markets, we report the results of an extensive empirical study estimating the maximum possible profitability of the most aggressive such practices, and arrive at figures that are surprisingly modest. By “aggressive” we mean any trading strategy exclusively employing market orders and relatively short holding periods. Our findings highlight the tension between execution costs and trading horizon confronted by high-frequency traders, and provide a controlled and large-scale empirical perspective on the high-frequency debate that has heretofore been absent. Our study employs a number of novel empirical methods, including the simulation of an “omniscient” high-frequency trader who can see the future and act accordingly.

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Date Posted: 24 July 2012