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Equilibrium Fast Trading

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

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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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 769.

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Date of creation: Mar 2013
Date of revision: Sep 2014
Publication status: Published in Journal of Financial Economics, vol. 116, n. 2, May 2015, p. 292-313.
Handle: RePEc:ide:wpaper:27008
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