Fast and slow informed trading

Ioanid Roşu

Journal of Financial Markets, 2019, vol. 43, issue C, 1-30

Abstract: I develop 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. 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)
JEL-codes: D82 G14 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:43:y:2019:i:c:p:1-30

DOI: 10.1016/j.finmar.2019.02.003

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