Trading Strategies at Optimal Frequencies: Theory and Evidence (original) (raw)
This paper studies a continuous-time stochastic game of trading activity in …nancial markets under asymmetric information. The model has the following features. First, informed and liquidity traders optimally control the timing of their order submissions. Second, they continuously choose whether to take or provide liquidity, issuing market or limit orders. Third, uninformed traders learn from the order ow optimally exploiting the information in the limit-order book. I construct an equilibrium in this setting and characterize (i) price formation and (ii) how optimal submission intensities and liquidity supply-demand behavior depend on private information and market conditions. I show that informed traders actively use both market and limit orders in equilibrium resulting in time-varying informed liquidity supply. After an information event, inter-arrival times are positively autocorrelated, the price impact of all order types increases and the limit-order book shows depth unbalances....
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