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Equilibrium Fast Trading

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  • Biais, Bruno
  • Foucault, Thierry
  • Moinas, Sophie

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

Suggested Citation

  • Biais, Bruno & Foucault, Thierry & Moinas, Sophie, 2013. "Equilibrium Fast Trading," IDEI Working Papers 769, Institut d'Économie Industrielle (IDEI), Toulouse, revised Sep 2014.
    • Handle: RePEc:ide:wpaper:27008
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    More about this item

    Keywords

    high-frequency trading; externalities; welfare;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • G1 - Financial Economics - - General Financial Markets
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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