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Fast and slow informed trading

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  • Roşu, Ioanid

Abstract

I develop a model in which traders receive a stream of private signals, and differ in their information processing speed. In equilibrium, the fast traders (FTs) quickly reveal a large fraction of their information. If a FT is averse to holding inventory, his optimal strategy changes considerably as his aversion crosses a threshold. He no longer takes long-term bets on the asset value, gets most of his profits in cash, and generates a “hot potato” effect: after trading on information, the FT quickly unloads part of his inventory to slower traders. The results match evidence about high-frequency traders.

Suggested Citation

  • Roşu, Ioanid, 2019. "Fast and slow informed trading," Journal of Financial Markets, Elsevier, vol. 43(C), pages 1-30.
    • Handle: RePEc:eee:finmar:v:43:y:2019:i:c:p:1-30
    DOI: 10.1016/j.finmar.2019.02.003
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    References listed on IDEAS

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    More about this item

    Keywords

    Trading volume; Inventory; Volatility; High-frequency trading; Price impact; Mean reversion;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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