Front-running and market quality : an evolutionary perspective on high frequency trading

Thorsten Hens (University of Zurich, Norwegian School of Economics, and Swiss Finance Institute), Terje Lensberg (Norwegian School of Economics), Klaus Reiner Schenk-Hoppé (Norwegian School of Economics and University of Manchester)

We study front-running by high frequency traders (HFTs) in a limit order model with continuous trading. The model describes an evolutionary equilibrium of low frequency traders (LFTs) who compete in portfolio management services by offering investment styles. The introduction of front-runners inflicts heavy losses on speculators, while leaving passive investors relatively unscathed. This encourages investment in the market portfolio and markedly reduces overall turnover. Speculative trading persists despite its lower profitability. By most measures, market quality is not affected to any significant extent by front-running HFTs

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Year of publication:	March 7, 2017
Authors:	Hens, Thorsten ; Lensberg, Terje ; Schenk-Hoppé, Klaus Reiner
Publisher:	Geneva : Swiss Finance Institute
Subject:	Front running \| HFT \| market quality \| Wertpapierhandel \| Securities trading \| Elektronisches Handelssystem \| Electronic trading \| Effizienzmarkthypothese \| Efficient market hypothesis \| Finanzmarktregulierung \| Financial market regulation \| Marktmikrostruktur \| Market microstructure \| Börsenkurs \| Share price \| Theorie \| Theory \| Evolutionsökonomik \| Evolutionary economics

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