High frequency trading, liquidity, and execution cost

Edward W. Sun, Kruse Timm, Min-Teh Yu

Research output: Contribution to journalArticlepeer-review

15 Scopus citations


We build a model under the framework of discrete optimization to explain how high frequency trading (HFT) can be applied to supply liquidity and reduce execution cost. We derive the analytical properties of our model in finding the optimal solution to minimize the overall execution cost of HFT. We show that the execution cost can be reduced after increasing trading frequency (i.e., the higher the trading frequency, the lower the execution cost) with a simulation study. In addition, we conduct an empirical investigation with tick level data from US equity market through January 2008 to October 2010 to verify our conclusion drawn from the simulation study. Based on the simulation and empirical results we collected, we show that the HFT can reduce the execution cost when supplying liquidity.
Original languageEnglish
Pages (from-to)403-432
Number of pages28
JournalAnnals of Operations Research
Issue number403-432
StatePublished - Dec 2014


  • Discrete optimization; High frequency trading; Liquidity; Price impact; Optimal execution

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