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Equilibrium Fast Trading

  • Biais, Bruno

    ()

  • Foucault, Thierry

    ()

  • Moinas, Sophie

    ()

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.

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Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 968.

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Length: 45 pages
Date of creation: 30 Oct 2013
Date of revision:
Handle: RePEc:ebg:heccah:0968
Contact details of provider: Postal: HEC Paris, 78351 Jouy-en-Josas cedex, France
Web page: http://www.hec.fr/
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  1. 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.).
  2. Manzano, Carolina & Vives, Xavier, 2010. "Public and Private Learning from Prices, Strategic Substitutability and Complementarity, and Equilibrium Multiplicity," CEPR Discussion Papers 7949, C.E.P.R. Discussion Papers.
  3. repec:dgr:kubcen:201087s is not listed on IDEAS
  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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