Departmental Papers (CIS)
Date of this Version
2010
Document Type
Journal Article
Recommended Citation
Michael J. Kearns, Alex Kulesza, and Yuriy Nevmyvaka, "Empirical Limitations on High Frequency Trading Profitability", . January 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.
Date Posted: 24 July 2012
Comments
Kearns, M., Kulesza, A., & Nevmyvaka, Y., Empirical Limitations on High Frequency Trading Profitability, Journal of Trading, 2010