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A Dysfunctional Role Of High Frequency Trading In Electronic Markets

Author

Listed:
  • ROBERT A. JARROW

    (Johnson Graduate School of Management, Cornell University, Ithaca, New York 14853, USA;
    Kamakura Corporation, USA)

  • PHILIP PROTTER

    (Statistics Depatrment, Columbia University, New York, NY 10027, USA)

Abstract

This paper shows that high frequency trading may play a dysfunctional role in financial markets. Contrary to arbitrageurs who make financial markets more efficient by taking advantage of and thereby eliminating mispricings, high frequency traders can create a mispricing that they unknowingly exploit to the disadvantage of ordinary investors. This mispricing is generated by the collective and independent actions of high frequency traders, coordinated via the observation of a common signal.

Suggested Citation

  • Robert A. Jarrow & Philip Protter, 2012. "A Dysfunctional Role Of High Frequency Trading In Electronic Markets," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 15(03), pages 1-15.
    • Handle: RePEc:wsi:ijtafx:v:15:y:2012:i:03:n:s0219024912500227
    DOI: 10.1142/S0219024912500227
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    References listed on IDEAS

    as
    1. Terrence Hendershott & Ryan Riordan, 2009. "Algorithmic Trading and Information," Working Papers 09-08, NET Institute, revised Aug 2009.
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