1. High Frequency Trading with Speed Hierarchies Wei Li Topics in Quantitative Finance Presented by Richard Lin Oct 5th 2015

2. Agenda Introduction Models and Findings Benchmark model General model Speed competition Market quality Conclusions Personal Opinions

3. Introduction General idea of HFTs Anticipate incoming orders and trade rapidly with short holding horizons to exploit normal-speed traders' latencies Characteristics of HFTs a)High trading volume b)Very short holding horizon c)Extremely rely on trading speed Innovative point in this paper Most existing papers assume all fast traders have homogeneous speeds. In this paper, it allows speed competition among fast traders and analyzes the effect of speed competition.

4. A typical trading round for HFT MMs post pricing function that other can trade against Informed and noise traders submit market orders Fast traders rapidly front- running by trading in the same direction at better prices ahead of the orders Fast traders reverse their trades and exit their positions at profits when normal-speed traders' orders arrived MMs update the final quoted price

5. Benchmark model Assumptions Only a monopolistic fast trader (no speed competition among fast traders) Based on extended Kyle (1985) framework with trading and quoting latencies All traders (include fast trader and normal-speed trader) are risk neutral

6. Benchmark model

7. Timeline and Information Structure Benchmark model

8. Speed, holding horizon and information Fast trader has speed advantage over all other traders (both normal-speed traders and market makers) Fast trader has to liquidate her position by the end of the trading round Fast trader has advance information about incoming order flow Benchmark model

12. Equilibrium analysis

13. General Model

16. Equilibrium analysis

17. General Model

18. Speed Competition

19. Speed competition and speed friction

20. Speed Competition

21. Market quality Information efficiency

22. Market quality

24. Conclusions

25. Personal Opinions If the market makers’ pricing function is not a linear one with fixed slope, which is close to real market, the HFTs may behave in a different and complicated way. The assumption that fast traders have to liquidate their position in one trading round is restrictive. Different fast traders may have different information signal rather than the same one. Needs more empirical test to improve the model.