D. Bernhardt
Front-running dynamics
Bernhardt, D.; Taub, B.
Authors
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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