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 renders fast traders trade earlier and temporally fragments the price discovery process. 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. Hence, the price discovery in late period depends on not only the number of slow traders but also the amount of fundamental uncertainty resolved earlier from fast traders. Therefore, the concentration of either fast or slow trader harms price discovery in late period, generating hump-shape overall price informativeness to speed competition. With fast information diffusion, speed competition harms the overall price informativeness. When fast traders are high-frequency traders, that is they trade at both early and late period, speed competition benefits the overall price informativeness.

Keywords: JEL classification: G12, G14, G18, D41, D44, D47, D82, D83, D84 Speed competition, information diffusion, strategic trading, price informativeness

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