EconPapers    
Economics at your fingertips  
 

Toxic Arbitrage

Thierry Foucault, Roman Kozhan () and Wing Wah Tham

No 9925, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: High frequency arbitrage opportunities sometimes arise when the price of one asset follows, with a lag, changes in the value of another related asset due to information arrival. These opportunities are toxic because they expose liquidity suppliers to the risk of being picked off by arbitrageurs. Hence, more frequent toxic arbitrage opportunities and a faster arbitrageurs' response to these opportunities impair liquidity. We find support for these predictions using high frequency triangular arbitrage opportunities in the FX market. In our sample, a 1% increase in the likelihood that a toxic arbitrage terminates with an arbitrageur's trade (rather than a quote update) raises bid-ask spreads by about 4%.

Keywords: Adverse Selection; Arbitrage; High Frequency Trading; Liquidity (search for similar items in EconPapers)
JEL-codes: D50 F31 G10 (search for similar items in EconPapers)
Date: 2014-04
New Economics Papers: this item is included in nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23) Track citations by RSS feed

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=9925 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Toxic Arbitrage (2017) Downloads
Working Paper: Toxic Arbitrage (2014) Downloads
Working Paper: Toxic Arbitrage (2014)
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:cpr:ceprdp:9925

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=9925

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

 
Page updated 2020-12-31
Handle: RePEc:cpr:ceprdp:9925