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Equilibrium Fast Trading


Bruno Biais


University of Toulouse 1 - Toulouse School of Economics (TSE)

Thierry Foucault


HEC Paris - Finance Department

Sophie Moinas


IAE - Université de Toulouse 1 Capitole; Toulouse School of Economics

August 2014

AFA 2013 San Diego Meetings Paper
HEC Paris Research Paper No. 968/2013

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 observe market 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. However, utilitarian welfare is maximized by having i) a single market type on which fast and slow traders coexist and ii) Pigovian taxes on investment in the fast trading technology.

Number of Pages in PDF File: 57

Keywords: high frequency trading, liquidity, welfare, adverse selection, investment

JEL Classification: G1, D4, D62, G20, L1

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Date posted: March 19, 2012 ; Last revised: September 4, 2014

Suggested Citation

Biais, Bruno and Foucault, Thierry and Moinas, Sophie, Equilibrium Fast Trading (August 2014). AFA 2013 San Diego Meetings Paper; HEC Paris Research Paper No. 968/2013. Available at SSRN: http://ssrn.com/abstract=2024360 or http://dx.doi.org/10.2139/ssrn.2024360

Contact Information

Bruno Biais (Contact Author)
University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )
Place Anatole-France
Toulouse Cedex, F-31042
France
Thierry Foucault
HEC Paris (Groupe HEC) - Finance Department ( email )
1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
(33)139679569 (Phone)
(33)139677085 (Fax)
HOME PAGE: http://thierryfoucault.com/

Sophie Moinas
IAE - Université de Toulouse 1 Capitole ( email )
Manufacture des Tabacs
21 Allée de Brienne
F-31000 Toulouse Cedex
France
33561128573 (Phone)
Toulouse School of Economics ( email )
Place Anatole-France
Toulouse Cedex, F-31042
France
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