Fast and Slow Informed Trading

Ioanid Rosu ()

No 1123, HEC Research Papers Series from HEC Paris

Abstract: This paper develops a model in which traders receive a stream of private signals, and differ in their information processing speed. In equilibrium, the fast traders (FTs) quickly reveal a large fraction of their information, and generate most of the volume, volatility and profits in the market. If a FT is averse to holding inventory, his optimal strategy changes considerably as his aversion crosses a threshold. He no longer takes long-term bets on the asset value, gets most of his profits in cash, and generates a "hot potato" effect: after trading on information, the FT quickly unloads part of his inventory to slower traders. The results match evidence about high frequency traders.

Keywords: Trading volume; inventory; volatility; high frequency trading; price impact; mean reversion (search for similar items in EconPapers)
Pages: 62 pages
Date: 2016-04-24
New Economics Papers: this item is included in nep-mst
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:1123

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