[Infowarrior] - Paper: A Dysfunctional Role of High Frequency Trading in Electronic Markets

[Richard Forno]

A Dysfunctional Role of High Frequency Trading in Electronic Markets

Robert A. Jarrow 
Cornell University - Samuel Curtis Johnson Graduate School of Management

Philip Protter 

March 8, 2011

Johnson School Research Paper Series No. 08-2011 

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.

Number of Pages in PDF File: 14

Working Paper Series
Date posted: March 09, 2011  

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1781124