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Abstract
Addressing the ongoing controversy of overly aggressive high-frequency trading practices in financial markets, Kearns, Kulesza, and Nevmyvaka report the results of an extensive empirical study estimating the maximum possible profitability of such practices and arrive at figures that are surprisingly modest. Their findings highlight the tension between execution cost and trading horizon that is confronted by high-frequency traders. They provide a controlled and large-scale empirical perspective on the high-frequency debate that has heretofore been absent. The authors’ study employs a number of novel empirical methods, including the simulation of an “omniscient” high-frequency trader who can see the future and act accordingly.
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