Les Cahiers de Recherche - HEC Paris
Fast and Slow Informed Trading
Abstract: This paper develops 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, and generate most of the volume, volatility
and profits in the market. 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.
Keywords: Trading volume; inventory; volatility; high frequency trading; price impact; mean reversion; (follow links to similar papers)
62 pages, April 24, 2016
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