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A limit order book model for latency arbitrage

Abstract:

We consider a single security market based on a limit order book and two investors, with different speeds of trade execution. If the fast investor can front-run the slower investor, we show that this allows the fast trader to obtain risk free profits, but that these profits cannot be scaled. We derive the fast trader's optimal behaviour when she has only distributional knowledge of the slow trader's actions, with few restrictions on the possible prior distributions. We also consider the slowe...

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Journal:
Mathematics and Financial Economics
Pages:
1-17
Publication date:
2011-10-21
EISSN:
1862-9660
ISSN:
1862-9679
Source identifiers:
193883
Keywords:
Pubs id:
pubs:193883
UUID:
uuid:b5d04b1c-2475-43a9-98fb-229063d8314a
Local pid:
pubs:193883
Deposit date:
2012-10-03

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