Fast and Slow Informed Trading
64 Pages Posted: 7 Jun 2011 Last revised: 28 Feb 2019
Date Written: February 26, 2019
I develop a model in which traders receive a stream of private signals, and differ in their information processing speed. In equilibrium, the fast traders (FTs) quickly reveal a large fraction of their information. If a FT is averse to holding inventory, his optimal strategy changes considerably as his aversion crosses a threshold. He no longer takes long-term bets on the asset value, gets most of his profits in cash, and generates a "hot potato" effect: after trading on information, the FT quickly unloads part of his inventory to slower traders. The results match evidence about high-frequency traders.
Keywords: Trading volume, inventory, volatility, high frequency trading, price impact, mean reversion
JEL Classification: G14, D82
Suggested Citation: Suggested Citation