Equilibrium Fast Trading
AbstractHigh-speed market connections and information processing improve …nancial institutions'ability to seize trading opportunities, which raises gains from trade. They also enable fast traders to process information before slow traders, which generates adverse selection. We fi…rst analyze trading equilibria for a given level of investment in fast-trading technology and then endogenize this level. Investments can be strategic substitutes or complements. In the latter case, investment waves can arise, where institutions invest in fast-trading technologies just to keep up with the others. When some traders become fast, it increases adverse selection costs for all, i.e., it generates negative externalities. Therefore equilibrium investment can exceed its welfare-maximizing counterpart.
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Bibliographic InfoPaper provided by HEC Paris in its series Les Cahiers de Recherche with number 968.
Length: 45 pages
Date of creation: 30 Oct 2013
Date of revision:
high frequency trading; liquidity; welfare;
Other versions of this item:
- Biais, Bruno & Foucault, Thierry & Moinas, Sophie, 2013. "Equilibrium Fast Trading," IDEI Working Papers, Institut d'Ãconomie Industrielle (IDEI), Toulouse 769, Institut d'Économie Industrielle (IDEI), Toulouse, revised Mar 2014.
- Biais, Bruno & Foucault, Thierry & Moinas, Sophie, 2013. "Equilibrium Fast Trading," TSE Working Papers, Toulouse School of Economics (TSE) 13-387, Toulouse School of Economics (TSE), revised Mar 2014.
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-11-09 (All new papers)
- NEP-CTA-2013-11-09 (Contract Theory & Applications)
- NEP-MST-2013-11-09 (Market Microstructure)
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