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《High Frequency Traders》.pdf
High Frequency Traders, News and Volatility∗
Victor H. Martinez† Ioanid Ro¸su‡
December 29, 2011
Abstract
This paper offers a rationale for high frequency trading. We model high fre-
quency traders (HFTs) as informed traders that observe a continuous stream of
signals, called news, and have uncertainty aversion regarding the level of the asset
value. We find that (i) HFTs generate most of the volatility and trading volume
in the market, in contrast with what other dynamic information models with price
impact predict; (ii) HFTs must use their information quickly, because an instant
later they take a significant percentage loss; (iii) when the number of HFTs in-
creases, volatility stays constant, while volume and liquidity increase; (iv) when
the HFTs’ news precision increases, volatility and volume increase, while liquid-
ity decreases. Rather than destabilizing markets, HFTs make the markets more
efficient by incorporating most of the new information as soon as it gets revealed
to them.
Keywords: Insider trading, Kyle model, noise trading, trading volume, al-
gorithmic trading, informed volatility, price impact, inventory, mark-to-model.
∗We thank Kerry Back, Laurent Calvet, Thierry Foucault, Johan Hombert, Pete Kyle, Stefano Lovo,
Jacques Olivier, Jiang Wang; seminar participants at HEC Paris and Durham Business School; and
conference participants at the Society for Advancement of Economic Theory, Portugal, and the Central
Bank Market Microstructure Workshop, Norway, for valuable comments.
†Baruch College, CUNY, Zicklin School of Business, Email: victor martinez@.
‡HEC Paris, Email: rosu@hec.fr.
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