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A Dysfunctional Role of High Frequency Trading in Electronic Markets

16 Pages Posted: 9 Mar 2011 Last revised: 30 Jun 2011

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management

Philip Protter

Columbia University

Date Written: June 29, 2011

Abstract

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

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

Robert A. Jarrow (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Department of Finance
Ithaca, NY 14853
United States
607-255-4729 (Phone)
607-254-4590 (Fax)

Philip Protter

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

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