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A Dysfunctional Role Of High Frequency Trading In Electronic Markets

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Author Info

  • 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.

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Bibliographic Info

Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.

Volume (Year): 15 (2012)
Issue (Month): 03 ()
Pages: 1250022-1-1250022-15

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Handle: RePEc:wsi:ijtafx:v:15:y:2012:i:03:p:1250022-1-1250022-15

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Related research

Keywords: High frequency traders; algorithmic traders; electronic trading; arbitrage opportunities; martingale measures;

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Cited by:
  1. Carrion, Allen, 2013. "Very fast money: High-frequency trading on the NASDAQ," Journal of Financial Markets, Elsevier, vol. 16(4), pages 680-711.
  2. Hasbrouck, Joel & Saar, Gideon, 2013. "Low-latency trading," Journal of Financial Markets, Elsevier, vol. 16(4), pages 646-679.
  3. Samuel N. Cohen & Lukasz Szpruch, 2011. "A limit order book model for latency arbitrage," Science & Finance (CFM) working paper archive 1110.4811, Science & Finance, Capital Fund Management.
  4. Yacine Aït-Sahalia & Mehmet Saglam, 2013. "High Frequency Traders: Taking Advantage of Speed," NBER Working Papers 19531, National Bureau of Economic Research, Inc.

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