Front‐Running and Market Quality: An Evolutionary Perspective on High Frequency Trading1. (23rd October 2017)

• Record Type: Journal Article
• Authors: Hens, Thorsten; Lensberg, Terje; Schenk‐Hoppé, Klaus Reiner
• Is Part Of: International review of finance. Volume 18:Number 4(2018:Dec.)
• Page Start: 727
• Page End: 741
• Publication Date: 2017-10-23
• Subjects: Finance -- Periodicals; Financial institutions -- Periodicals; 332.673
• DOI: 10.1111/irfi.12159
• Languages: English
• ISSNs: 1369-412X

Abstract

Abstract: 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 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.