The share of market making conducted by high-frequency trading

(HFT) firms has been rising steadily. A distinguishing feature of HFTs is that they trade intraday, ending the day flat. To shed light on the economics of HFTs, and in a departure from existing market making theories, we model an HFT that has access to unlimited leverage intraday but must fund any end-of-day inventory at an exogenously determined cost. Even though the inventory costs only occur at the end of the day, they impact intraday price and liquidity dynamics. This gives rise to an intraday endogenous price impact mechanism. As time approaches the end of the trading day, the sensitivity of prices to inventory levels intensifies, making price impact stronger and widening bid-ask spreads. Moreover, imbalances of buy and sell orders may catalyze hikes and drops of prices, even under fixed supply and demand functions. Empirically, we show that these predictions are borne out in the U.S. Treasury market, where bid-ask spreads and price impact tend to rise towards the end of the day. Furthermore, price movements are negatively correlated with changes in inventory levels as measured by the cumulative net trading volume. (based on joint work with Tobias Adrian, Erik Vogt, and Hongzhong Zhang)

Short Bio:

Agostino received his Master and Ph.D. Degree in Computer Science and Applied and Computational Mathematics from the California Institute of Technology, respectively in 2006 and 2009. His main research interests are in the area of networks, systemic risk, counterparty risk, central clearing, principal agent problems, dynamic robust optimization, and most recently high frequency trading. His research contributes to a better understanding of risk management practices, and to assess the impact of regulatory policies aimed at monitoring and stabilizing financial markets. His research has been published in the top-tier journals of the field, including Mathematical Finance, Finance and Stochastics, SIAM Journal of Financial Mathematics, Operations Research, Mathematics of Operations Research, and Management Science. His work has also been published in leading practitioner journals and invited book chapters.

Agostino served as a member of the roundtable on central clearing interdependencies, a study group established by the Basel Committee on Banking Supervision (BCBS), the Committee on Payments and Market Infrastructures (CPMI), the Financial Stability Board (FSB), and the International Organization of Securities Commissions (IOSCO). He has on-going collaborations with the main regulatory agencies in the United States, including the Federal Reserve Board, the Federal Reserve Bank of New York, the Office of Financial Research, and the US Commodity Futures Trading Commission. His research has been funded by the Institute for New Economic Thinking, the Global Risk Institute, and DARPA. He is the recipient of the the Bar-Ilan general prize for research in Financial Mathematics, and of a honorable mention from the MIT Center for Finance and Policy and the Harvard Crowd Innovation Laboratory. Agostino serves as the department editor for financial engineering at the Institute of Industrial Engineering Transactions, and as an associate editor of Operations Research Letters.