IDEAS home Printed from https://ideas.repec.org/p/ebg/heccah/0968.html
   My bibliography  Save this paper

Equilibrium Fast Trading

Author

Listed:
  • Biais, Bruno
  • Foucault, Thierry
  • Moinas, Sophie

Abstract

High-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.

Suggested Citation

  • Biais, Bruno & Foucault, Thierry & Moinas, Sophie, 2013. "Equilibrium Fast Trading," HEC Research Papers Series 968, HEC Paris.
    • Handle: RePEc:ebg:heccah:0968
    as

    Download full text from publisher

    File URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2024360
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Grossman, Sanford J, 1976. "On the Efficiency of Competitive Stock Markets Where Trades Have Diverse Information," Journal of Finance, American Finance Association, vol. 31(2), pages 573-585, May.
    2. Vincent Glode & Richard C. Green & Richard Lowery, 2012. "Financial Expertise as an Arms Race," Journal of Finance, American Finance Association, vol. 67(5), pages 1723-1759, October.
    3. Venky Venkateswaran & Luis Llosa, 2012. "Efficiency With Endogenous Information Choice," 2012 Meeting Papers 660, Society for Economic Dynamics.
    4. Mark Bagnoli & Ted Bergstrom, 2006. "Log-concave probability and its applications," Studies in Economic Theory, in: Charalambos D. Aliprantis & Rosa L. Matzkin & Daniel L. McFadden & James C. Moore & Nicholas C. Yann (ed.), Rationality and Equilibrium, pages 217-241, Springer.
    5. Jayant Vivek Ganguli & Liyan Yang, 2009. "Complementarities, Multiplicity, and Supply Information," Journal of the European Economic Association, MIT Press, vol. 7(1), pages 90-115, March.
    6. Dimitri Vayanos, 1999. "Strategic Trading and Welfare in a Dynamic Market," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(2), pages 219-254.
    7. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    8. Darrell Duffie, 2012. "Over-The-Counter Markets," Introductory Chapters, in: Dark Markets: Asset Pricing and Information Transmission in Over-the-Counter Markets, Princeton University Press.
    9. Jonathan Brogaard & Terrence Hendershott & Ryan Riordan, 2014. "High-Frequency Trading and Price Discovery," Review of Financial Studies, Society for Financial Studies, vol. 27(8), pages 2267-2306.
    10. Hendershott, Terrence & Riordan, Ryan, 2013. "Algorithmic Trading and the Market for Liquidity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 48(4), pages 1001-1024, August.
    11. Luca Colombo & Gianluca Femminis & Alessandro Pavan, 2014. "Information Acquisition and Welfare," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(4), pages 1438-1483.
    12. Haoxiang Zhu, 2014. "Do Dark Pools Harm Price Discovery?," Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 747-789.
    13. Baron, Matthew & Brogaard, Jonathan & Hagströmer, Björn & Kirilenko, Andrei, 2019. "Risk and Return in High-Frequency Trading," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(3), pages 993-1024, June.
    14. Manzano, Carolina & Vives, Xavier, 2011. "Public and private learning from prices, strategic substitutability and complementarity, and equilibrium multiplicity," Journal of Mathematical Economics, Elsevier, vol. 47(3), pages 346-369.
    15. Albert J. Menkveld & Boyan Jovanovic, 2010. "Middlemen in Limit Order Markets," 2010 Meeting Papers 955, Society for Economic Dynamics.
    16. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    17. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-574, September.
    18. O'Hara, Maureen & Ye, Mao, 2011. "Is market fragmentation harming market quality?," Journal of Financial Economics, Elsevier, vol. 100(3), pages 459-474, June.
    19. Xiaojuan Hu & Cheng-Zhong Qin, 2013. "Information acquisition and welfare effect in a model of competitive financial markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 54(1), pages 199-210, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Pavan, Alessandro & Vives, Xavier, 2015. "Information, Coordination, and Market Frictions: An Introduction," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 407-426.
    2. Oliver Linton & Soheil Mahmoodzadeh, 2018. "Implications of High-Frequency Trading for Security Markets," Annual Review of Economics, Annual Reviews, vol. 10(1), pages 237-259, August.
    3. Vayanos, Dimitri & Wang, Jiang, 2013. "Market Liquidity—Theory and Empirical Evidence ," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1289-1361, Elsevier.
    4. Rahi, Rohit, 2021. "Information acquisition with heterogeneous valuations," Journal of Economic Theory, Elsevier, vol. 191(C).
    5. Duffie, Darrell & Malamud, Semyon & Manso, Gustavo, 2015. "Reprint of: Information percolation in segmented markets," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 838-869.
    6. Nicholas Hirschey, 2021. "Do High-Frequency Traders Anticipate Buying and Selling Pressure?," Management Science, INFORMS, vol. 67(6), pages 3321-3345, June.
    7. Hatheway, Frank & Kwan, Amy & Zheng, Hui, 2017. "An Empirical Analysis of Market Segmentation on U.S. Equity Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(6), pages 2399-2427, December.
    8. Sánchez Serrano Antonio, 2020. "High-Frequency Trading and Systemic Risk: A Structured Review of Findings and Policies," Review of Economics, De Gruyter, vol. 71(3), pages 169-195, December.
    9. Thierry Foucault & Sophie Moinas & Bruno Biais, 2014. "Equilibrium Fast Traders," 2014 Meeting Papers 1207, Society for Economic Dynamics.
    10. Delaney, Laura, 2018. "Investment in high-frequency trading technology: A real options approach," European Journal of Operational Research, Elsevier, vol. 270(1), pages 375-385.
    11. Kondor, Péter & Zawadowski, Adam, 2019. "Learning in crowded markets," Journal of Economic Theory, Elsevier, vol. 184(C).
    12. Veldkamp, Laura & Farboodi, Maryam, 2018. "Long Run Growth of Financial Data Technology," CEPR Discussion Papers 13278, C.E.P.R. Discussion Papers.
    13. Conrad, Jennifer & Wahal, Sunil, 2020. "The term structure of liquidity provision," Journal of Financial Economics, Elsevier, vol. 136(1), pages 239-259.
    14. James Dow & Itay Goldstein & Alexander Guembel, 2017. "Incentives for Information Production in Markets where Prices Affect Real Investment," Journal of the European Economic Association, European Economic Association, vol. 15(4), pages 877-909.
    15. Peter Gomber & Satchit Sagade & Erik Theissen & Moritz Christian Weber & Christian Westheide, 2017. "Competition Between Equity Markets: A Review Of The Consolidation Versus Fragmentation Debate," Journal of Economic Surveys, Wiley Blackwell, vol. 31(3), pages 792-814, July.
    16. Nicolae Gârleanu & Lasse Heje Pedersen, 2018. "Efficiently Inefficient Markets for Assets and Asset Management," Journal of Finance, American Finance Association, vol. 73(4), pages 1663-1712, August.
    17. Van Ness, Bonnie & Van Ness, Robert & Yildiz, Serhat, 2021. "Private information in trades, R2, and large stock price movements," Journal of Banking & Finance, Elsevier, vol. 131(C).
    18. Mäkinen, Taneli & Ohl, Björn, 2015. "Information acquisition and learning from prices over the business cycle," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 585-633.
    19. Vayanos, Dimitri & Wang, Jiang, 2009. "Liquidity and asset prices: a united framework," LSE Research Online Documents on Economics 29303, London School of Economics and Political Science, LSE Library.
    20. Donald B. Keim & Massimo Massa & Bastian von Beschwitz, 2018. "First to \"Read\" the News: New Analytics and Algorithmic Trading," International Finance Discussion Papers 1233, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    Keywords

    high frequency trading; liquidity; welfare;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ebg:heccah:0968. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Antoine Haldemann (email available below). General contact details of provider: https://edirc.repec.org/data/hecpafr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.