Articlegreen2012

A DYSFUNCTIONAL ROLE OF HIGH FREQUENCY TRADING IN ELECTRONIC MARKETS

143 citations0/0 files storedInternational Journal of Theoretical and Applied Finance

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Financial Markets and Investment Strategies Stochastic processes and financial applications FinTech, Crowdfunding, Digital Finance

Abstract

This paper shows that high frequency trading may play a dysfunctional role in financial markets. Contrary to arbitrageurs who make financial markets more efficient by taking advantage of and thereby eliminating mispricings, high frequency traders can create a mispricing that they unknowingly exploit to the disadvantage of ordinary investors. This mispricing is generated by the collective and independent actions of high frequency traders, coordinated via the observation of a common signal.

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References

2005Stochastic Integration and Differential Equations 2003Financial Modelling with Jump Processes 2011Does Algorithmic Trading Improve Liquidity?2008A General Version of the Fundamental Theorem of Asset Pricing (1994)1994A general version of the fundamental theorem of asset pricing 2011Low-Latency Trading 1998The fundamental theorem of asset pricing for unbounded stochastic processes 1992Market Manipulation, Bubbles, Corners, and Short Squeezes

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2013High Frequency Quoting: Short-Term Volatility in Bids and Offers 2012The Volume Clock: Insights into theHigh-Frequency Paradigm 2019High frequency trading and comovement in financial markets 2017The Competitive Landscape of High-Frequency Trading Firms 2016Price discovery and the cross-section of high-frequency trading 1991Rock around the Clock : An agent-based model of low- and high-frequency trading

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