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1、EquilibriumHighFrequencyTrading1BrunoBiaisThierryFoucaultToulouseSchoolofEconomicsHEC,Paris21AlléedeBrienne1ruedelaLiberation31000Toulouse,France78351JouyenJosas,Francebruno.biais@univ-tlse1.frfoucault@hec.frSophieMoinasToulouseSchoolofEconomics21AlléedeBrienne31000Toulouse,Frances
2、ophie.moinas@univ-tlse1.frOctober26,20111WearegratefultoTerrenceHendershott,CarolinaManzano,AlbertMenkveld,RafaelRe-pulloandparticipantstotheconferenceon"HighFrequencyTrading:…nancialandregulatoryimplications"inMadridfortheirsuggestions.Thisresearchbene…tedfromthesupportofthe“Finan
3、cialMarketsandInvestmentBankingValueChain”ChairsponsoredbytheFédérationBancaireFrançaiseandoftheANR(ANR-09-JCJC-0139-01).ManythankstoVivienLévy-Garboua,Charles-AlbertLehalle,EricRousselandJeanTricouforstimulatingdiscussions.Allerrorsareours.AbstractHighFrequencyTrading(HFT)improves
4、investors’abilitytoseizetradingopportunities,whichraisesgainsfromtrade.Italsoenablesfasttraderstoprocessinformationbeforeslowtraders,whichgeneratesadverseselection.We…rstanalyzetradingequilibriaforagivenlevelofHFTandthenendogenizeinvestmentinHFT.Whensometradersbecomefast,itincrease
5、sadverseselectioncostsfortheothers,thusHFTgeneratesnegativeexternalities.ThereforeequilibriuminvestmentinHFTexceedsitsutilitarianwelfare–maximizingcoun-terpart.Furthermore,sinceitinvolves…xedcosts,investmentinHFTismorepro…tableforlargeinstitutionsthanforsmallones.Hence,inequilibriu
6、m,smallinstitutionsarelessinformedthanlargeonesandexitthemarketwhenHFTbecomesprevalent.1Introduction‘Wellinourcountry’saidAlice,stillpantingalittle,‘you’dgenerallygettosomewhereelse–ifyouranveryfastforalongtime,aswehavebeendoing.’‘Aslowsortofcountry!’saidtheQueen.‘Now,here,yousee,i
7、ttakesalltherunningyoucando,tokeepinthesameplace.Ifyouwanttogosomewhereelse,youmustrunatleasttwiceasfastasthat!’LewisCarroll,ThroughtheLookingGlassTradersmustcollectandprocessvastamountsofinformationaboutfundamentals,quotes,transactionprices,etc...Computerscancompletethesetasksfast
8、erandsome-timesbetterthanh
