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Equilibrium fast trading

Author

Listed:
  • Bruno Biais

    (BFP - Biologie du fruit et pathologie - Université Bordeaux Segalen - Bordeaux 2 - INRA - Institut National de la Recherche Agronomique - UB - Université Sciences et Technologies - Bordeaux 1)

  • Thierry Foucault

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Sophie Moinas

    (Finance - CRM - Centre de Recherche en Management - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - IAE - Institut d'Administration des Entreprises - Toulouse - CNRS - Centre National de la Recherche Scientifique)

Abstract

High speed market connections improve investors׳ ability to search for attractive quotes in fragmented markets, raising gains from trade. They also enable fast traders to obtain information before slow traders, generating adverse selection, and thus negative externalities. When investing in fast trading technologies, institutions do not internalize these externalities. Accordingly, they overinvest in equilibrium. Completely banning fast trading is dominated by offering two types of markets: one accepting fast traders, the other banning them. Utilitarian welfare is maximized with (i) a single market type on which fast and slow traders coexist and (ii) Pigovian taxes on investment in the fast trading technology

Suggested Citation

  • Bruno Biais & Thierry Foucault & Sophie Moinas, 2015. "Equilibrium fast trading," Post-Print halshs-01400252, HAL.
    • Handle: RePEc:hal:journl:halshs-01400252
    DOI: 10.1016/j.jfineco.2015.03.004
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    References listed on IDEAS

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    More about this item

    Keywords

    High-frequency trading; Externalities; Welfare;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • G1 - Financial Economics - - General Financial Markets
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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