# Derivation of the Boltzmann Equation for Financial Brownian Motion: Direct Observation of the Collective Motion of High-Frequency Traders

## TL;DR

This paper develops a microscopic model of high-frequency traders' collective behavior in financial markets, deriving Boltzmann-like equations and validating them with empirical data, bridging microscopic dynamics with market-level phenomena.

## Contribution

It introduces the first microscopic model of HFTs validated by direct data analysis, linking microscopic trader behavior to macroscopic market dynamics.

## Key findings

- Quantitative empirical law of traders' trend-following behavior
- Derivation of Boltzmann-like and Langevin-like equations for HFTs
- Model validation showing agreement with market data

## Abstract

A microscopic model is established for financial Brownian motion from the direct observation of the dynamics of high-frequency traders (HFTs) in a foreign exchange market. Furthermore, a theoretical framework parallel to molecular kinetic theory is developed for the systematic description of the financial market from microscopic dynamics of HFTs. We report first on a microscopic empirical law of traders' trend-following behavior by tracking the trajectories of all individuals, which quantifies the collective motion of HFTs but has not been captured in conventional order-book models. We next introduce the corresponding microscopic model of HFTs and present its theoretical solution paralleling molecular kinetic theory: Boltzmann-like and Langevin-like equations are derived from the microscopic dynamics via the Bogoliubov-Born-Green-Kirkwood-Yvon hierarchy. Our model is the first microscopic model that has been directly validated through data analysis of the microscopic dynamics, exhibiting quantitative agreements with mesoscopic and macroscopic empirical results.