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Equilibrium Fast Trading

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

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 observe market 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. However, utilitarian welfare is maximized by having i) a single market type 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/bfm_sept2014.pdf
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File URL: http://idei.fr/doc/by/moinas/OnlineAppendix_bfm_sept2014.pdf
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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: Sep 2014
Publication status: Published in Journal of Financial Economics, 2015.
Handle: RePEc:tse:wpaper:26999
Contact details of provider: Phone: (+33) 5 61 12 86 23
Web page: http://www.tse-fr.eu/
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  1. Carolina Manzano & Xavier Vives, 2010. "Public and Private Learning from Prices, Strategic Substitutability and Complementarity, and Equilibrium Multiplicity," CESifo Working Paper Series 3137, CESifo Group Munich.
  2. 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.).
  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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