Equilibrium Fast Trading

Bruno Biais, Thierry Foucault and Sophie Moinas

No 968, HEC Research Papers Series from HEC Paris

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.

Keywords: high frequency trading; liquidity; welfare (search for similar items in EconPapers)
JEL-codes: G10 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2013-10-30
New Economics Papers: this item is included in nep-cta and nep-mst
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Citations: View citations in EconPapers (23)

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Related works:
Journal Article: Equilibrium fast trading (2015)
Working Paper: Equilibrium fast trading (2015)
Working Paper: Equilibrium Fast Trading (2014)
Working Paper: Equilibrium Fast Trading (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:0968

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