Trading Large Orders in the Presence of Multiple High-Frequency Anticipatory Traders

ArXiv ID: 2403.08202 “View on arXiv”

Authors: Unknown

Abstract

We investigate a market with a normal-speed informed trader (IT) who may employ mixed strategy and multiple anticipatory high-frequency traders (HFTs) who are under different inventory pressures, in a three-period Kyle’s model. The pure- and mixed-strategy equilibria are considered and the results provide recommendations for IT’s randomization strategy with different numbers of HFTs. Some surprising results about investors’ profits arise: the improvement of anticipatory traders’ speed or a more precise prediction may harm themselves but help IT.

Keywords: Kyle’s Model, High-Frequency Trading, Information Asymmetry, Strategic Trading, Market Microstructure

Complexity vs Empirical Score

• Math Complexity: 8.5/10
• Empirical Rigor: 1.5/10
• Quadrant: Lab Rats
• Why: The paper is heavily theoretical, building on and extending Kyle’s classic microstructure model with multiple HFTs and mixed strategies, requiring advanced stochastic calculus and equilibrium analysis. It lacks any empirical backtests, real data, or implementation details, focusing solely on theoretical propositions and proofs.

  flowchart TD
    A["Research Goal<br>Optimal Large Order Trading Strategy"] --> B["Methodology<br>Three-Period Kyle's Model"]
    B --> C{"Consider Equilibria"}
    C --> C1["Pure-Strategy"]
    C --> C2["Mixed-Strategy"]
    C1 & C2 --> D["Key Inputs<br>Multiple HFTs & Inventory Pressures"]
    D --> E["Computational Process<br>Equilibrium Analysis"]
    E --> F["Key Findings"]
    F --> F1["Randomization improves IT profit vs multiple HFTs"]
    F --> F2["Speed/Precision can harm HFTs but help IT"]
    F --> F3["Inventory pressure determines HFT behavior"]