The Dark Side of Regulating Fast Informed Trading
84 Pages Posted: 16 Aug 2018 Last revised: 13 Aug 2020
Date Written: June 28, 2018
A speed bump in financial markets is an intentional delay imposed on trade execution. Its primary purpose is to mitigate asymmetric information by slowing down high-frequency traders (HFTs). In contrast to its intended purpose, this paper shows that a speed bump has the crowding-in effect on speed acquisition of HFTs, meaning that it can fuel their investment in high-speed technology. I investigate when the crowding-in effect dominates a speed bump’s intended effect and explain its ambiguous impact on speed acquisition and equilibrium market quality.
Keywords: High-frequency trading, market structure, speed bumps, adverse selection, strategic speed decision
JEL Classification: D40, D47, G10, G18, G20
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