Modern electronic markets have enabled faster execution of orders and more efficient arbitrage between similar securities in different (or fragmented) markets. In a similar vein, market making (and market “taking”, or liquidity consumption) has become an automated process, where latency and probabilistic decisions play an important role.
In this reality larger size orders (metaorders) are usually broken down into “child” orders and optimal execution schedules designed to minimize the market impact of these orders.
In Understanding the stakes of high frequency trading, Charles and Mathieu review these new developments, how the price formation process has been reshaped by high frequency traders, with examples of their various strategies and their profitability. A final section discusses recent tools designed in order to assess and control the high frequency trading activity.
Other papers deal with the presence of HFTs in moments of stress, how to measure volatility in high-frequency data, what should be the price in a high-frequency market, and similar questions.
The approach of the chair is to measure and model the activity of these participants and find (through simulations and market data analysis) how changes in market structure and regulation will impact the markets.