News Trading and Speed

Foucault, Thierry; Hombert, Johan; Rosu, Ioanid

doi:10.2139/ssrn.2188822

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News Trading and Speed

Journal of Finance, Vol. 71, pp. 335-382, 2016

HEC Paris Research Paper No. 975/2013

55 Pages Posted: 14 Dec 2012 Last revised: 19 Jan 2016

See all articles by Thierry Foucault

Ioanid Rosu

HEC Paris - Finance Department

Date Written: January 19, 2016

Abstract

We compare the optimal trading strategy of an informed speculator when he can trade ahead of incoming news (is "fast"), versus when he cannot (is "slow"). We find that speed matters: the fast speculator's trades account for a larger fraction of trading volume, and are more correlated with short-run price changes. Nevertheless, he realizes a large fraction of his profits from trading on long-term price changes. The fast speculator's behavior matches evidence about high frequency traders. We predict that stocks with more informative news are more liquid even though they attract more activity from informed high frequency traders.

Keywords: News, liquidity, volume, price discovery, high frequency trading

JEL Classification: G14, D82, D83

Suggested Citation: Suggested Citation

Foucault, Thierry and Hombert, Johan and Rosu, Ioanid, News Trading and Speed (January 19, 2016). Journal of Finance, Vol. 71, pp. 335-382, 2016, HEC Paris Research Paper No. 975/2013, Available at SSRN: https://ssrn.com/abstract=2188822 or http://dx.doi.org/10.2139/ssrn.2188822