The Transaction Costs of Risk Management vs. Speculation in an Electronic Trading Environment

Switzer, Lorne N.; Fan, Haibo

doi:10.3905/jot.2007.694832

JOT

2007

DOI: 10.3905/jot.2007.694832

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The Transaction Costs of Risk Management vs. Speculation in an Electronic Trading Environment

Lorne N. Switzer¹,

Haibo Fan²

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Cited by 2 publications

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Patience vs. impatience of traders: Formation of the value-at-price distribution through competition for liquidity

Lerner

2015

J. Finan. Eng.

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An ability to postpone one's execution without much penalty provides an important strategic advantage in high-frequency trading. To quantify competition between traders one has to resort to a consistent theory of formation of the execution price from market expectations and quotes. This theory was provided in 2005 by Foucault, Kadan and Kandel. I derive asymptotic distribution of the bids/offers as a function of the ratio of patient and impatient traders using my modification of the Foucault, Kadan and Kandel dynamic Limit Order Book (LOB) model.My modification of the LOB model allows stylized but sufficiently realistic representation of the trading markets. In particular, dynamic LOB allows simulation of the distribution of execution times and spreads from high-frequency quotes. Significant analytic progress is made towards understanding of trading as competition for immediacy of execution between traders. The results are qualitatively compared with empirical volume-at-price distribution of highly liquid stocks.Keywords: Limit order book (LOB), Foucault, Kadan and Kandel model, bid-ask spread, market microstructure. JEL: G14, G12, C63.

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Patience vs. impatience of traders: Formation of the value-at-price distribution through competition for liquidity

Lerner

2015

J. Finan. Eng.

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Market Liquidity and Ownership Structure with Weak Protection for Minority Shareholders: Evidence from Brazil and Chile

Cueto

2009

SSRN Journal

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The Transaction Costs of Risk Management vs. Speculation in an Electronic Trading Environment

Cited by 2 publications

References 40 publications

Patience vs. impatience of traders: Formation of the value-at-price distribution through competition for liquidity

Patience vs. impatience of traders: Formation of the value-at-price distribution through competition for liquidity

Market Liquidity and Ownership Structure with Weak Protection for Minority Shareholders: Evidence from Brazil and Chile

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