Mean Field Game of High-Frequency Anticipatory Trading
The interactions between a large population of high-frequency traders (HFTs) and a large trader (LT) who executes a certain amount of assets at discrete time points are studied. HFTs are faster in the sense that they trade continuously and predict the transactions of LT. A jump process is applied to model the transition of HFTs' attitudes towards inventories and the equilibrium is solved through the mean field game approach. When the crowd of HFTs is averse to running (ending) inventories, they first take then supply liquidity at each transaction of LT (throughout the whole execution period). Inventory-averse HFTs lower LT's costs if the market temporary impact is relatively large to the permanent one. What's more, the repeated liquidity consuming-supplying behavior of HFTs makes LT's optimal strategy close to uniform trading.
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