Fast and Slow Informed Trading

Rosu, Ioanid

doi:10.2139/ssrn.1859265

Download This Paper

Open PDF in Browser

Add Paper to My Library

Fast and Slow Informed Trading

Journal of Financial Markets, Vol. 43, Mar. 2019, pp. 1-30 (Lead Article)

HEC Paris Research Paper No. FIN-2015-1123

64 Pages Posted: 7 Jun 2011 Last revised: 16 Mar 2021

See all articles by Ioanid Rosu

Ioanid Rosu

HEC Paris - Finance Department

Date Written: March 1, 2019

Abstract

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

Rosu, Ioanid, Fast and Slow Informed Trading (March 1, 2019). Journal of Financial Markets, Vol. 43, Mar. 2019, pp. 1-30 (Lead Article), HEC Paris Research Paper No. FIN-2015-1123, Available at SSRN: https://ssrn.com/abstract=1859265 or http://dx.doi.org/10.2139/ssrn.1859265