Front-Running and Market Quality: An Evolutionary Perspective on High Frequency Trading

Thorsten Hens, Terje Lensberg and Klaus Schenk-Hoppé
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Thorsten Hens: University of Zurich, Norwegian School of Economics and Business Administration (NHH), and Swiss Finance Institute

No 17-10, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We study front-running by high frequency traders (HFTs) in a limit order model with continuous trading. The model describes an evolutionary equilibrium of low frequency traders (LFTs) who compete in portfolio management services by offering investment styles. The introduction of front-runners inflicts heavy losses on speculators, while leaving passive investors relatively unscathed. This encourages investment in the market portfolio and markedly reduces overall turnover. Speculative trading persists despite its lower profitability. By most measures, market quality is not affected to any significant extent by front-running HFTs.

Keywords: Front running; HFT; market quality (search for similar items in EconPapers)
Pages: 23 pages
Date: 2017-03, Revised 2017-09
New Economics Papers: this item is included in nep-ban
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Related works:
Journal Article: Front‐Running and Market Quality: An Evolutionary Perspective on High Frequency Trading (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1710

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