  We build an agent-based model to study how the interplay between low- and
high-frequency trading affects asset price dynamics. Our main goal is to
investigate whether high-frequency trading exacerbates market volatility and
generates flash crashes. In the model, low-frequency agents adopt trading rules
based on chronological time and can switch between fundamentalist and chartist
strategies. On the contrary, high-frequency traders activation is event-driven
and depends on price fluctuations. High-frequency traders use directional
strategies to exploit market information produced by low-frequency traders.
Monte-Carlo simulations reveal that the model replicates the main stylized
facts of financial markets. Furthermore, we find that the presence of
high-frequency trading increases market volatility and plays a fundamental role
in the generation of flash crashes. The emergence of flash crashes is explained
by two salient characteristics of high-frequency traders, i.e. their ability to
i) generate high bid-ask spreads and ii) synchronize on the sell side of the
limit order book. Finally, we find that higher rates of order cancellation by
high-frequency traders increase the incidence of flash crashes but reduce their
duration.
