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Equilibrium fast trading

Bruno Biais, Thierry Foucault and Sophie Moinas

Journal of Financial Economics, 2015, vol. 116, issue 2, 292-313

Abstract: High speed market connections improve investors׳ ability to search for attractive quotes in fragmented markets, raising gains from trade. They also enable fast traders to obtain information before slow traders, generating adverse selection, and thus negative externalities. When investing in fast trading technologies, institutions do not internalize these externalities. Accordingly, they overinvest in equilibrium. Completely banning fast trading is dominated by offering two types of markets: one accepting fast traders, the other banning them. Utilitarian welfare is maximized with (i) a single market type on which fast and slow traders coexist and (ii) Pigovian taxes on investment in the fast trading technology.

Keywords: High-frequency trading; Externalities; Welfare (search for similar items in EconPapers)
JEL-codes: D4 D62 G1 G20 L1 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (172)

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Working Paper: Equilibrium fast trading (2015)
Working Paper: Equilibrium Fast Trading (2014) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:116:y:2015:i:2:p:292-313

DOI: 10.1016/j.jfineco.2015.03.004

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