A DYSFUNCTIONAL ROLE OF HIGH FREQUENCY TRADING IN ELECTRONIC MARKETS

Robert Jarrow () and Philip Protter ()
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Philip Protter: Statistics Depatrment, Columbia University, New York, NY 10027, USA

International Journal of Theoretical and Applied Finance (IJTAF), 2012, vol. 15, issue 03, 1-15

Abstract: This paper shows that high frequency trading may play a dysfunctional role in financial markets. Contrary to arbitrageurs who make financial markets more efficient by taking advantage of and thereby eliminating mispricings, high frequency traders can create a mispricing that they unknowingly exploit to the disadvantage of ordinary investors. This mispricing is generated by the collective and independent actions of high frequency traders, coordinated via the observation of a common signal.

Keywords: High frequency traders; algorithmic traders; electronic trading; arbitrage opportunities; martingale measures (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (36)

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DOI: 10.1142/S0219024912500227

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