Fast and Slow Informed Trading

62 Pages Posted: 7 Jun 2011 Last revised: 24 Apr 2016

Ioanid Rosu

HEC Paris - Finance Department

Date Written: April 24, 2016

Abstract

This paper develops 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, and generate most of the volume, volatility and profits in the market. 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: C7, D4, G1

Suggested Citation

Rosu, Ioanid, Fast and Slow Informed Trading (April 24, 2016). AFA 2013 San Diego Meetings; Paris December 2015 Finance Meeting EUROFIDAI - AFFI; 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

Ioanid Rosu (Contact Author)

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

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