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Equilibrium Fast Trading

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

Abstract

High-speed market connections and information processing improve the ability to seize trading opportunities, raising gains from trade. They also enable fast traders to process 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 platforms: one accepting fast traders, the other banning them. Utilitarian welfare is maximized by having i) a single platform on which fast and slow traders coexist and ii) Pigovian taxes on investment in the fast-trading technology

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File URL: http://idei.fr/doc/by/moinas/Equilibrium_fast_trading_March_2014.pdf
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Bibliographic Info

Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 13-387.

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Date of creation: Mar 2013
Date of revision: Mar 2014
Handle: RePEc:tse:wpaper:26999

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  1. 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.
  2. 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.
  3. Alain Chaboud & Benjamin Chiquoine & Erik Hjalmarsson & Clara Vega, 2009. "Rise of the machines: algorithmic trading in the foreign exchange market," International Finance Discussion Papers 980, Board of Governors of the Federal Reserve System (U.S.).
  4. 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, 03.
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Cited by:
  1. Zhiguo He & Asaf Manela, 2012. "Information Acquisition in Rumor Based Bank Runs," NBER Working Papers 18513, National Bureau of Economic Research, Inc.
  2. Hagströmer, Björn & Nordén, Lars, 2013. "The diversity of high-frequency traders," Journal of Financial Markets, Elsevier, vol. 16(4), pages 741-770.
  3. Austin Gerig & David Michayluk, 2014. "Automated Liquidity Provision," Research Paper Series 345, Quantitative Finance Research Centre, University of Technology, Sydney.
  4. Jørgensen, Kjell & Skjeltorp, Johannes Atle & Ødegaard, Bernt Arne, 2014. "Throttling hyperactive robots - Message to trade ratios at the Oslo Stock Exchange," UiS Working Papers in Economics and Finance 2014/3, University of Stavanger.
  5. Hoffmann, Peter, 2014. "A dynamic limit order market with fast and slow traders," Journal of Financial Economics, Elsevier, vol. 113(1), pages 156-169.
  6. Jonathan Brogaard & Corey Garriott & Anna Pomeranets, 2014. "High-Frequency Trading Competition," Working Papers 14-19, Bank of Canada.
  7. Scholtus, Martin & van Dijk, Dick & Frijns, Bart, 2014. "Speed, algorithmic trading, and market quality around macroeconomic news announcements," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 89-105.

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