Front-running dynamics

• 成果类型: Article
• 署名作者: Bernhardt, Dan; Taub, Baft
• 署名单位: University of Illinois System; University of Illinois Urbana-Champaign
• 刊物名称: JOURNAL OF ECONOMIC THEORY
• ISSN/ISSBN: 0022-0531
• DOI: 10.1016/j.jet.2007.05.005
• 发表日期: 2008
• 页码: 288-296
• 关键词: dual trading; informed speculators; frontrunning; liquidity trade; private information

摘要

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. (C) 2007 Elsevier Inc. All rights reserved.