Computational speed and high-frequency trading profitability: an ecological perspective

High-frequency traders (HFTs) account for a considerable component of equity trading but we know little about the source of their trading profits and to what extend IT based differentiators such as news processing power and ultra-low latency has contributed to competitive advantage within HFT realm. Given a fairly modest amount of empirical evidence on the subject, we study the effects of computational speed on HFTs’ profits through an experimental artificial agent-based equity market. Our approach relies on an ecological modelling inspired from the r/K selection theory, and is designed to assess the relative financial performance of two classes of aggressive HFT agents endowed with dissimilar computational capabilities. We use a discrete-event news simulation system to capture the information processing disparity and order transfer delay, and simulate the dynamics of the market. Through Monte Carlo simulation we obtain in our empirical setting robust estimates of the expected outcome.