Markus Baldauf, Joshua Mollner, 31 October 2019

Financial markets process orders faster than ever before. Although faster speeds are associated with smaller spreads, they may also lead to less informative prices. This column captures this trade-off within a theoretical model of high-frequency trading in modern financial markets. It then uses the model to evaluate some potential market design responses to high-frequency trading that are currently in debate. In particular, it shows that asymmetric speed bumps improve markets by eliminating an inefficient form of high-frequency trading.

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