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Front-running dynamics

Bernhardt, D.; Taub, B.

Authors

D. Bernhardt

B. Taub



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.

Citation

Bernhardt, D., & Taub, B. (2008). Front-running dynamics. Journal of Economic Theory, 138(1), 288-296. https://doi.org/10.1016/j.jet.2007.05.005

Journal Article Type Article
Publication Date Jan 1, 2008
Deposit Date Jul 20, 2011
Journal Journal of Economic Theory
Print ISSN 0022-0531
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 138
Issue 1
Pages 288-296
DOI https://doi.org/10.1016/j.jet.2007.05.005
Keywords Dual trading, Informed speculators, Frontrunning, Liquidity trade, Private information.
Public URL https://durham-repository.worktribe.com/output/1505974

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