Are Order Anticipation Strategies Harmful? A Theoretical Approach. (arXiv:1609.00599v1 [q-fin.TR])

High frequency traders employ order anticipation strategies to benefit from price impact generated by large institutional investors. While there is little doubt that this practice increases execution shortfall for the institutional investor, it is unclear whether it reduces market quality. We study order anticipation strategies in a game model of optimal execution and derive the unique Nash equilibrium in closed form. Our analysis suggests that order anticipation strategies may positively affect market quality by reducing price deviation and short-term volatility.