Equilibrium fast trading

Abstract

International audienceHigh speed market connections improve investors׳ ability to search for attractive quotes in fragmented markets, raising gains from trade. They also enable fast traders to obtain 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 types of markets: one accepting fast traders, the other banning them. Utilitarian welfare is maximized with (i) a single market type on which fast and slow traders coexist and (ii) Pigovian taxes on investment in the fast trading technolog

Policy uncertainty, derivatives use, and firm-level FDI

“…Specifically, derivatives allow for payments tied to publicly observable and verifiable events that are correlated with firms' unobservable (or unverifiable) cash flow outcomes. Derivatives are supplied by derivative counterparties that are subject to moral hazard, which is mitigated via collateral requirements, as observed in Biais et al (2015).…”

High-Frequency Trading Competition

“…Biais, Foucault and Moinas (2013) explain why slow traders may choose to become fast and that increased HFT participation will increase adverse selection costs. Pagnotta and Philippon (2011) show that competition among HFTs decreases profits, but that the competition is of Cournot type and so profits remain positive, while Jovanovic and Menkveld (2010) model an environment in which HFTs compete away any profits.…”

Market Microstructure Design and Flash Crashes: A Simulation Approach

“…Equilibrium models of limit order markets (with continuous auctions) include Parlour (1998), Foucault (1999, Biais, Martimor, and Rochet (2000), Parlour and Seppi (2003), Foucault, Kadan and Kandel (2005), Goettler, Parlour, and Rajan (2005), Back and Baruch (2007), Weill (2009), andBias, Foucault andMoinas (2013), among others. These papers aim to derive the equilibrium price formation process and most of them do not compare different market designs.…”

“…In the theoretical literature on market microstructure, our paper is most closely related to the above mentioned Biais and Weill (2009), and Bias, Foucault and Moinas (2013). The former paper studies how, in equilibrium, limit order markets absorb transient liquidity shocks when traders behave strategically.…”

“…In the paper Bias, Foucault, and Moinas (2013). a liquidity shock happens endogenously, because of the presence of two types of traders, algorithmic traders and human traders.…”