Reference

Bruno Biais, Thierry Foucault, and Sophie Moinas, “Equilibrium Fast Trading”, IDEI Working Paper, n. 769, March 2013, revised September 2014.

Abstract

High-speed market connections and information processing improve the ability to seize trading opportunities, raising gains from trade. They also enable fast traders to process information before slow traders, generating adverse selection, and thus negative externalities. When investing in fast trading technologies, institutions do not internalize these externalities. Accordingly, they overinvest in equilibrium. Completely banning fast trading is dominated by offering two platforms: one accepting fast traders, the other banning them. Utilitarian welfare is maximized by having i) a single platform on which fast and slow traders coexist and ii) Pigovian taxes on investment in the fast trading technology

Keywords

high-frequency trading; externalities; welfare;

JEL codes

  • D4: Market Structure and Pricing
  • D62: Externalities
  • G1: General Financial Markets
  • G20: General
  • L1: Market Structure, Firm Strategy, and Market Performance

Replaced by

Bruno Biais, Thierry Foucault, and Sophie Moinas, “Equilibrium Fast Trading”, Journal of Financial Economics, vol. 116, n. 2, May 2015, pp. 292–313.