The Dark Side of Regulating Fast Informed Trading

84 Pages Posted: 16 Aug 2018 Last revised: 13 Aug 2020

See all articles by Jun Aoyagi

Jun Aoyagi

University of California, Berkeley - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: June 28, 2018

Abstract

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

Suggested Citation

Aoyagi, Jun, The Dark Side of Regulating Fast Informed Trading (June 28, 2018). Available at SSRN: https://ssrn.com/abstract=3221990 or http://dx.doi.org/10.2139/ssrn.3221990

Jun Aoyagi (Contact Author)

University of California, Berkeley - Department of Economics ( email )

CA
United States

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