16 Pages Posted: 9 Mar 2011 Last revised: 30 Jun 2011
Date Written: June 29, 2011
This paper shows that high frequency trading may play a dysfunctional role in financial markets. Contrary to arbitrageurs who make financial markets more efficient by taking advantage of and thereby eliminating mispricings, high frequency traders can create a mispricing that they unknowingly exploit to the disadvantage of ordinary investors. This mispricing is generated by the collective and independent actions of high frequency traders, coordinated via the observation of a common signal.
Suggested Citation: Suggested Citation
Jarrow, Robert A. and Protter, Philip, A Dysfunctional Role of High Frequency Trading in Electronic Markets (June 29, 2011). Johnson School Research Paper Series No. 08-2011. Available at SSRN: https://ssrn.com/abstract=1781124 or http://dx.doi.org/10.2139/ssrn.1781124