High Frequency Trading: Strategic Competition between Slow and Fast Traders

32 Pages Posted: 22 Mar 2017

See all articles by Herve Boco

Herve Boco

Toulouse Business School

Laurent Germain

Toulouse University, Toulouse Business School

Fabrice Rousseau

National University of Ireland, Maynooth (NUI Maynooth) - Department of Economics, Finance and Accounting

Date Written: March 21, 2017

Abstract

In the following paper we analyze the strategic competition between fast and slow traders. The model of Kyle (1985) is adapted to analyze the effect of speed in such a model. A High Frequency Trader (HFT) is defined as a trader that has the ability to react to information faster than other informed traders and as a consequence can trade more than other traders.

This trader benefits from low latency compared to slower trader. In such a setting, we prove the existence and the unicity of an equilibrium with fast and slow traders. We find that the speed advantage of High Frequency Traders (HFTs) has a beneficial effect on market liquidity as well as price efficiency. The positive effect on liquidity is present only if there are 2 or more HFTs. However, despite those effects slower traders are at a disadvantage as they are not able to trade on their private information as many times as their HFTs counterpart.

When they are able to trade on it, most of their private information has been incorporated into prices due to the latency of HFTs. This implies that slower traders are worse off when HFTs are present. The speed differential benefits HFTs as they earn higher expected profits than their slower counterparts and also benefits liquidity traders. We find the existence of an optimal level of speed for HFT.

Keywords: High frequency trading, Insider, Volatility, Market efficiency

JEL Classification: D43, D82, G14, G24

Suggested Citation

Boco, Herve and Germain, Laurent and Rousseau, Fabrice, High Frequency Trading: Strategic Competition between Slow and Fast Traders (March 21, 2017). Available at SSRN: https://ssrn.com/abstract=2938593 or http://dx.doi.org/10.2139/ssrn.2938593

Herve Boco

Toulouse Business School ( email )

20 Boulevard Lascrosses
Toulouse, 31068
France

Laurent Germain (Contact Author)

Toulouse University, Toulouse Business School ( email )

20, bd Lascrosses
Toulouse, 31000
France

Fabrice Rousseau

National University of Ireland, Maynooth (NUI Maynooth) - Department of Economics, Finance and Accounting ( email )

County Kildare
Ireland
+353 (0) 1 7084568 (Phone)

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