Speed Competition and Strategic Trading

Abstract

This paper examines the effect of speed competition on price informativeness in financial markets with large strategic traders. Speed competition temporally fragments the price discovery process. As a result, large traders internalize their price impact and strategically shade trading aggressiveness to resolve a fraction of the pre-trading uncertainty proportional to the number of traders in each trading round. Therefore, the concentration of fast traders improves information aggregation in the short run but harms it in the long run, generating hump-shape price informativeness to speed competition. Moreover, speed competition reduces overall price informativeness with a relatively high inter-temporal information dissemination over time. Still, it promotes overall price informativeness with a relatively low intra-temporal information spread among traders.

Keywords: Speed competition, information diffusion, strategic trading, price informativeness

JEL Classification: G12, G14, G18, D41, D44, D47, D82, D83, D84