A dynamic limit order market with fast and slow traders

Peter Hoffmann

Journal of Financial Economics, 2014, vol. 113, issue 1, 156-169

Abstract: This paper considers the role of high-frequency trading in a dynamic limit order market. Fast traders׳ ability to revise their quotes quickly after news arrivals helps to reduce the inefficiency that is rooted in the risk of being picked off, which increases trade. However, their presence induces slow traders to strategically submit limit orders with a lower execution probability, thereby reducing trade. Because speed is a source of market power, it enables fast traders to extract rents from other market participants and triggers a costly arms race that reduces social welfare. The model generates a number of testable implications concerning the effects of high-frequency trading in limit order markets.

Keywords: High-frequency trading; Limit order market (search for similar items in EconPapers)
JEL-codes: C72 G12 G19 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (100)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X14000610
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:113:y:2014:i:1:p:156-169

DOI: 10.1016/j.jfineco.2014.04.002

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().