Are Front-running HFTs Harmful?

This paper is concerned with how a front-running high-frequency trader (HFT) influences the large trader: whether and under what conditions the latter is harmed or benefited. We study, in the extended Kyle's model, the interactions between a large informed trader and an HFT who can predict the former's incoming order in some extent. Equilibria under various specific situations are discussed. We conclude that HFT always front-runs and the large trader could be favored in the following circumstances: (1) there is sufficient noise trading with HFT's liquidity-consuming trading; (2) the noise trading with HFT's liquidity-consuming trading is inadequate but HFT's signal is vague enough. Besides, we explore the influences of market noise and signal noise on investors' behavior and profits. We find surprisingly that (1) increasing the noise in HFT's signal might decrease the large trader's profit; (2) when there are few market noises, although HFT nearly does nothing, the large trader is still hurt; (3) in any case, HFT will not front-run more than half of the large trader's order