A Dysfunctional Role of High Frequency Trading in Electronic Markets
Robert A. Jarrow
Cornell University - Samuel Curtis Johnson Graduate School of Management
June 29, 2011
Johnson School Research Paper Series No. 08-2011
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.
Number of Pages in PDF File: 16
Date posted: March 9, 2011 ; Last revised: June 30, 2011