19 novembre 2012, 12h30–14h00
Salle MF 323
Fédération des Banques Françaises Seminar
Résumé
A limit-order market enables an early seller to trade with a late buyer by leaving a price quote. But, public news in the interarrival period creates adverse selection for the seller and therefore hampers trade. Machines, operated by high-frequency traders (HFTs), might restore trade by bringing the capacity to quickly update quotes on news. A theoretical model shows that HFT entry can indeed increase welfare, but it might also reduce it. Empirically, HFT entry coincided with a 23% drop in adverse-selection cost on price quotes and a 17% increase in trade frequency. Model calibration reveals a modest welfare increase.