High Frequency Trading Review


    Thierry Foucault
    HEC, Paris ; Centre for Economic Policy Research (CEPR)

    Johan Hombert
    HEC Paris

    Ioanid Rosu
    HEC Paris

    December 9, 2012

    Informed trading can take two forms: (i) trading on more accurate information or (ii) trading on public information faster than other investors. The latter is increasingly important due to technological advances. To disentangle the effects of accuracy and speed, we derive the optimal dynamic trading strategy of an informed investor when he reacts to news (i) at the same speed or (ii) faster than other market participants, holding information precision constant. With a speed advantage, the informed investor’s order flow is much more volatile, accounts for a much bigger fraction of trading volume, and forecasts very short run price changes. We use the model to analyze the effects of high frequency traders on news (HFTNs) on liquidity, volatility, price discovery and provide empirical predictions about the determinants of their activity.

    Foucault, Thierry, Hombert, Johan and Rosu, Ioanid, News Trading and Speed (December 9, 2012). Available at SSRN: http://ssrn.com/abstract=2188822 or http://dx.doi.org/10.2139/ssrn.2188822

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