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Front-running dynamics.

Bernhardt, D. and Taub, B. (2008) 'Front-running dynamics.', Journal of economic theory., 138 (1). pp. 288-296.

Abstract

We integrate a monopolist dual trader into a dynamic model of speculation. In static settings, [J.-C. Rochet, J.-L. Vila, Insider trading without normality, Rev. Econ. Stud. 61 (1994), 131–152] establish an irrelevance result—expected equilibrium outcomes are the same whether the monopolist speculator sees liquidity trade or not; and Roell [Dual-capacity trading and market quality, J. Finan. Intermediation (1990), 105–124] shows that with multiple speculators, dual trading benefits liquidity traders. In dynamic settings, these results are reversed: a front-running speculator exploits knowledge of future liquidity trade, extracting greater profits by smoothing profit extraction intertemporally. Front running introduces positive serial correlation to order flow. Accordingly, market makers discount past order flow in prices, but prices retain the martingale property.

Item Type:Article
Keywords:Dual trading, Informed speculators, Frontrunning, Liquidity trade, Private information.
Full text:Full text not available from this repository.
Publisher Web site:http://dx.doi.org/10.1016/j.jet.2007.05.005
Record Created:09 Aug 2011 09:50
Last Modified:13 Jun 2012 09:23

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