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Equilibrium Fast Trading

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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
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    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)

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